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STLD, NUE Set Tone for Steel Producer Earnings: 4 Picks
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Two leading steel producers have reported earnings so far and it’s going to be a solid start to the year for the industry, if these reports are anything to go by.
Zacks #1 (Strong Buy) ranked Steel Dynamics (STLD - Free Report) beat earnings estimates by 5.3% on revenue that was just short (because of weaker pricing). #1 ranked Nucor (NUE - Free Report) on the other hand beat on revenue by 2.5% and on earnings by 16.8%. Clearly, Nucor did much better than STLD, but we’ll get to that in a bit.
Before that, let’s take a look at the secular drivers that management of both companies talked about. In the words of Nucor management: “for now, the fundamentals driving nonresidential construction and infrastructure projects appear to be quite healthy. Three pieces of legislation: the Infrastructure Investment Act, the Inflation Reduction Act, and the CHIPS Act, provide a combined $975 billion of funding or tax incentives, which will have a multiplier effect on the actual amount of capital deployed. Taken together, we believe that these three programs have the potential to generate up to 8 million tons of incremental steel demand per year over the balance of this decade. According to the American Iron and Steel Institute, an estimated 5 million tons of steel is needed for every $100 billion in infrastructure spending. On top of that, we expect IRA will drive significant investment in clean energy, adding approximately 2 million tons to 3 million tons of annual steel demand for wind, solar, and transmission projects. There also have been more than 30 announced semiconductor plants or expansions in response to the CHIPS Act. These are massive steel-intensive factories that take billions of dollars and years to build.”
STLD management agreed that ”continued onshoring of manufacturing, coupled with the robust U.S. infrastructure program and industrial build-outs, supports strong demand for 2023 and beyond.” Additionally, the auto market is also strong for STLD.
As a result, Steel Dynamics, has its construction backlog swelling and extending into the fourth quarter. Record steel volume and increased metals recycling prices (due to increased demand in the domestic market) are driving its results.
Nucor, which has sizable exposure to the non-residential construction space, said that both infrastructure and manufacturing investment were driving results. The company’s steel mill utilization rate increased 10% from the December quarter to touch 80%. Management is optimistic about the long-term outlook and feels confident that its flexible operating model and variable cost structure will ensure continued profitability. Its significant domestic production capabilities and low-carbon footprint set it apart from other players.
Neither dwelt on macro concerns, other than to say that they would get through them smoothly. Steel Dynamics is however seeing some supply chain, labor and construction materials constraints that led to some orders getting pushed out. Nucor has a track record of operating profitably through downturns and emerging from them even stronger. The long-term investments in its conservative capital structures are designed to withstand all economic cycles, and this time is no different, management says.
Given the solid outlook for the industry and the strong showing by these companies, this may be a good time to buy some other steel stocks before they report.
ArcelorMittal (MT - Free Report) for instance has a Zacks Rank #1 and earnings Expected Surprise Prediction (ESP) of 0.0%, which indicates that it too will beat estimates when it reports on May 4. Its estimates have already risen substantially in the last 30 days.
Olympic Steel (ZEUS - Free Report) , which shares the same rank as the others and ESP of 0.0% also looks headed in the same direction. It too reports on May 4.
Zacks #1 ranked Ryerson (RYI - Free Report) reports on May 1 but we don’t have an ESP indicator for this stock.
Another stock worth buying is Zacks #1 ranked U.S. Steel (X - Free Report) , which reports April 27. There is notable increase in its estimates in the last seven days.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
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STLD, NUE Set Tone for Steel Producer Earnings: 4 Picks
Two leading steel producers have reported earnings so far and it’s going to be a solid start to the year for the industry, if these reports are anything to go by.
Zacks #1 (Strong Buy) ranked Steel Dynamics (STLD - Free Report) beat earnings estimates by 5.3% on revenue that was just short (because of weaker pricing). #1 ranked Nucor (NUE - Free Report) on the other hand beat on revenue by 2.5% and on earnings by 16.8%. Clearly, Nucor did much better than STLD, but we’ll get to that in a bit.
Before that, let’s take a look at the secular drivers that management of both companies talked about. In the words of Nucor management: “for now, the fundamentals driving nonresidential construction and infrastructure projects appear to be quite healthy. Three pieces of legislation: the Infrastructure Investment Act, the Inflation Reduction Act, and the CHIPS Act, provide a combined $975 billion of funding or tax incentives, which will have a multiplier effect on the actual amount of capital deployed. Taken together, we believe that these three programs have the potential to generate up to 8 million tons of incremental steel demand per year over the balance of this decade. According to the American Iron and Steel Institute, an estimated 5 million tons of steel is needed for every $100 billion in infrastructure spending. On top of that, we expect IRA will drive significant investment in clean energy, adding approximately 2 million tons to 3 million tons of annual steel demand for wind, solar, and transmission projects. There also have been more than 30 announced semiconductor plants or expansions in response to the CHIPS Act. These are massive steel-intensive factories that take billions of dollars and years to build.”
STLD management agreed that ”continued onshoring of manufacturing, coupled with the robust U.S. infrastructure program and industrial build-outs, supports strong demand for 2023 and beyond.” Additionally, the auto market is also strong for STLD.
As a result, Steel Dynamics, has its construction backlog swelling and extending into the fourth quarter. Record steel volume and increased metals recycling prices (due to increased demand in the domestic market) are driving its results.
Nucor, which has sizable exposure to the non-residential construction space, said that both infrastructure and manufacturing investment were driving results. The company’s steel mill utilization rate increased 10% from the December quarter to touch 80%. Management is optimistic about the long-term outlook and feels confident that its flexible operating model and variable cost structure will ensure continued profitability. Its significant domestic production capabilities and low-carbon footprint set it apart from other players.
Neither dwelt on macro concerns, other than to say that they would get through them smoothly. Steel Dynamics is however seeing some supply chain, labor and construction materials constraints that led to some orders getting pushed out. Nucor has a track record of operating profitably through downturns and emerging from them even stronger. The long-term investments in its conservative capital structures are designed to withstand all economic cycles, and this time is no different, management says.
Given the solid outlook for the industry and the strong showing by these companies, this may be a good time to buy some other steel stocks before they report.
ArcelorMittal (MT - Free Report) for instance has a Zacks Rank #1 and earnings Expected Surprise Prediction (ESP) of 0.0%, which indicates that it too will beat estimates when it reports on May 4. Its estimates have already risen substantially in the last 30 days.
Olympic Steel (ZEUS - Free Report) , which shares the same rank as the others and ESP of 0.0% also looks headed in the same direction. It too reports on May 4.
Zacks #1 ranked Ryerson (RYI - Free Report) reports on May 1 but we don’t have an ESP indicator for this stock.
Another stock worth buying is Zacks #1 ranked U.S. Steel (X - Free Report) , which reports April 27. There is notable increase in its estimates in the last seven days.
Year-to-Date Price Performance
Image Source: Zacks Investment Research