In recent years, steel has experienced increased demand from the automotive, manufacturing, and consumer goods industries due to its high durability and malleability. Considering the favorable industry backdrop, investors seem to be buzzing about the fundamentally sound steel stocks Nucor Corporation (NUE), Commercial Metals Company (CMC), and Friedman Industries, Incorporated (FRD).
But before delving into the fundamentals of these stocks, let’s look at the core catalysts driving the steel sector’s growth.
Overcapacity in steel production, increasing trade actions, persistent inflation, high-interest rates, and slow adoption of green steel pose some bottlenecks to the industry’s growth. However, it is returning to its original position in the current year.
The World Steel Association released its Short-Range Outlook, predicting a 2.3% rebound in steel demand to 1.82 billion metric tons in 2023. It also expects a 1.7% growth in 2024, reaching 1.85 billion mt.
As per the U.S. Department of Commerce, U.S. monthly steel imports witnessed a significant increase of 20.2% in June, reaching 2.53 million metric tons. In terms of value, U.S. steel imports for June amounted to $3.23 billion compared to May’s $3.07 billion.
Moreover, there is a marked increase in the demand for steel and stainless-steel scraps in the next few years, leading to its substantial demand in the market. Also, the global steel market is projected to reach 2.3 billion metric tons by 2030, growing at a CAGR of 3%.
Rapid urbanization, increasing investments in the infrastructure sector, rising automotive production, and growth in the food industry will oversee the growth of the steel market at a CAGR of 2.6%, to be valued at $1.01 trillion by 2025.
Given the solid footing of the steel industry, let’s discuss the above-mentioned stocks in detail.
Nucor Corporation (NUE)
NUE manufactures and sells steel and steel products through three segments: Steel Mills, Steel Products, and Raw Materials. It produces carbon and alloy steel, hollow structural section tubing, electrical conduit, steel racking, steel deck, cold-finished steel, steel fasteners, insulated metal panels, and others.
On June 14, the company unveiled the building of its Towers & Structures business unit’s second state-of-the-art utility structures production facility in Crawfordsville, Indiana. The new facility will have location advantages and could help meet the growing demand for utility infrastructure from renewable energy projects, EV charging network expansion, and grid hardening. In addition, the facility would be automated to utilize efficient straight-line production.
On June 1, NUE signed an agreement with Exxon Mobil Corporation (XOM) to capture, transport, and store carbon from the company’s Direct Reduced Iron (DRI) plant in Convent, Louisiana.
Under this arrangement, XOM will capture up to 800,000 metric tons per year of CO2 from the DRI plant and store the CO2 at its owned facility in Louisiana. This project aligns perfectly with the company’s decarbonization efforts and should help reach its net-zero CO2 emissions by 2050.
Further, the carbon capture and storage agreement with XOM positions NUE as a sustainability leader and builds on the innovation that has enabled the company to produce steel and steel products with low embodied carbon.
In the same month, NUE declared a quarterly dividend of $0.51 per share, payable to its shareholders on August 11, 2023. Backed by its strong cash flows and ability to boost shareholder return, this marked its 201st consecutive quarterly cash dividend.
It pays an annual dividend of $2.04, which translates to a dividend yield of 1.21%, while its four-year average yield is 2.25%. The company’s dividend payouts have grown at CAGRs of 8.1% and 5.9% over the past three and five years, respectively. Also, it has a record of 49 years of consecutive dividend growth.
In the second quarter (ended July 1, 2023), NUE’s net sales amounted to $9.52 billion, while its costs, expenses, and other declined 10% year-over-year to $7.47 billion. Its net earnings attributable to stockholders came in at $1.46 billion and $5.81 per share.
In addition, as of July 1, 2023, NUE’s cash and cash equivalents and total current assets amounted to $4.51 billion and $15.29 billion, representing an increase of 5.4% and 4.1% from $4.28 billion and $14.69 billion for the period ended December 31, 2022.
For the fiscal third quarter (ending September 2023), NUE’s EPS and revenue are expected to be $4.73 and $8.80 billion, respectively. The company has an impressive earnings surprise history surpassing the EPS estimates in three of the trailing four quarters.
Moreover, its revenue has grown at CAGRs of 22.2% and 10.9% over the past three and five years, respectively. Also, its EPS improved at a 134.8% CAGR over the past three years.
The stock’s trailing-12-month EBIT and net income margins of 20.27% and 14.81% are 80.6% and 126.4% higher than the industry averages of $11.23% and 6.54%, respectively. Likewise, its ROCE, ROTC, and ROTA of 30.02%, 17.90%, and 16.62% compare to the 9.19%, 5.76%, and 4.08% industry averages, respectively.
The stock has gained 30.6% year-to-date and 26.7% over the past year to close the last trading session at $172.09.
NUE’s POWR Ratings reflect this promising outlook. It has an A grade for Quality and B for Momentum. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Among the 34 stocks in the A-rated Steel industry, it is ranked #19. To see additional POWR Ratings for Growth, Value, Stability, and Sentiment for NUE, click here.
Commercial Metals Company (CMC)
CMC manufactures, recycles, and fabricates steel and metal products and related materials and services. In addition, it manufactures rebars; merchant bars; and wire rods; and sells fabricated rebars; wire meshes; fabricated meshes; assembled rebar cages; and other fabricated rebar by-products to fabricators; manufacturers; distributors; and construction companies.
On July 18, CMC received permission from the West Virginia Department of Environmental Protection to commence construction of its fourth technologically advanced micro mill. With this development, the company aims to begin further construction activities to achieve its commissioning date of 2025.
In the same month, the company announced the acquisition of EDSCO Fasteners LLC, a leading provider of anchoring solutions for the electrical transmission market, from MiddleGround Capital. This acquisition is expected to enhance CMC’s capabilities as a leader in construction reinforcement and further developments.
For the third quarter that ended on May 31, 2023, CMC’s total net sales increased 6.8% from the year-ago value to $2.34 billion. During the same period, its adjusted earnings amounted to $239.73 million and $2.02 per share, while its non-GAAP adjusted EBITDA stood at $374.08 million.
In addition, as of May 31, 2023, its total assets increased 4.6% from $6.24 billion for the period ended August 31, 2022, to $6.52 billion. Also, the company’s net cash flows from operating activities improved 286.6% year-over-year to $934.68 million.
On July 12, 2023, CMC paid its shareholders a quarterly dividend of $0.16, up 14.3% year-over-year. The company’s annual dividend of $0.64 yields 1.12% at the current price level, while its four-year average yield is 1.84%. Its dividend payouts have grown at CAGRs of 10.1% and 5.9% over the past three and five years, respectively.
CMC’s trailing-12-month EBIT, net income, and levered FCF margins of 14.31%, 10.72%, and 6.99% are 27.5%, 63.8%, and 96.8% higher than the industry averages of 11.23%, 6.54%, and 3.55%, respectively. Also, its trailing-12-month ROCE and ROTA of 26.91% and 14.79% compare to the industry averages of 9.19% and 4.08%, respectively.
Analysts expect CMC’s EPS and revenue for the fourth quarter (ending August 2023) to amount to $2.05 and $2.26 billion. Its EPS is expected to increase by 9.7% per annum over the next five years. The company surpassed the revenue and EPS estimates in all four trailing quarters, which is promising.
Over the past three years, CMC’s EBITDA and net income have grown at 32.6% and 47.9% CAGRs, respectively. Moreover, its revenue has grown at a 17.1% CAGR over the same period.
CMC’s shares have gained 25.8% over the past nine months and 44.4% over the past year to close the last trading session at $57.22.
CMC’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to Buy in our proprietary rating system.
It also has a B grade for Value, Momentum, Sentiment, and Quality. Within the same A-rated industry, it is ranked #11. Click here to see the other ratings of CMC for Growth and Stability.
Friedman Industries, Incorporated (FRD)
FRD engages in steel processing, pipe manufacturing, and processing, and the steel and pipe distribution businesses in the United States. It operates in two segments, Coil and Tubular. Its principal customers for these products and services are steel distributors and customers manufacturing steel products.
On June 20, the company declared a dividend of $0.02 per share on its common stock, payable to shareholders on August 11, 2023. This dividend marks the company’s 206th consecutive quarterly cash dividend since becoming publicly traded in 1972.
FRD’s four-year average dividend yield is 1.29%, and its current dividend of $0.08 translates to a 0.45% yield on prevailing prices. Also, its dividend payout has grown at a 2.7% CAGR over the past five years.
During the fourth quarter that ended on March 31, 2023, FRD’s net sales increased by 65.3% from the prior-year quarter to $124.19 million. Its earnings from operations amounted to $7.25 million compared to a loss from operations of $4.27 million in the year-ago period.
The company’s net earnings stood at $6.31 million, and $0.86 per share improved significantly from the prior-year quarter’s net loss of $7.46 million and $1.11 per share.
FRD’s revenue has increased at CAGRs of 56.8% and 35.2% over the past three and five years, respectively. In addition, its total assets have improved at a CAGR of 37.1% over the past three years.
The stock’s trailing-12-month ROCE, ROTC, and ROTA of 21.54%, 11.21%, and 10.71% are 134.3%, 94.7%, and 162.6% higher than the industry averages of 9.19%, 5.76%, and 4.08%, respectively. Likewise, its asset turnover ratio of 3.05x compares to the industry average of 0.74x.
Over the past nine months, the stock has gained 85.3% to close the last trading session at $17.79.
It’s no surprise that FRD has an overall rating of B, which translates to Buy in our proprietary rating system. It has an A grade for Growth and Value and a B for Momentum and Sentiment. Out of 34 stocks in the same industry, it is ranked #8.
In addition to the POWR Ratings we’ve stated above, we also have FRD’s ratings for Quality and Stability. Get all FRD ratings here.
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NUE shares were trading at $173.07 per share on Tuesday afternoon, up $0.98 (+0.57%). Year-to-date, NUE has gained 32.17%, versus a 20.15% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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