Nucor Corporation (NUE) and Cleveland-Cliffs Inc. (CLF) are two leading producers of steel and steel products in the United States. Charlotte, N.C.-based NUE operates through three segments–Steel Mills; Steel Products; and Raw Materials. It also produces ferrous and nonferrous metals and brokers ferrous and nonferrous metals, pig iron, hot briquetted iron (HBI), and galvanized sheet steel. Its products are sold by its in-house sales force and internal distribution and trading companies. In comparison, CLF in Cleveland, Ohio, is vertically integrated from mined raw materials and direct reduced iron to primary steelmaking and downstream finishing, stamping, tooling, and tubing. It offers flat-rolled steel products, custom-made pellets, and hot briquetted iron (HBI).
The resumption of industrial and construction activities blasted the steel industry out of its pandemic-lows last year. However, the largest steel producer, China, decided to curb its output to reduce its carbon emissions, which has led to a supply crunch worldwide and pushed steel prices higher in 2021. However, this has encouraged domestic companies to gain more market reach.
However, overproduction has been driving a decline in steel prices lately. Steel makers’ decision to hike prices to overcome rising input costs is expected to help them stay afloat in the near term. In addition, last fall’s passage of a bipartisan Infrastructure bill, which provides significant funding to improve infrastructure, should enable the industry to grow substantially in the coming years. Investors’ interest in this space is evidenced by the VanEck Vectors Steel ETF’s (SLX) 6.6% gains year-to-date versus SPDR S&P 500 Trust ETF’s (SPY) negative returns. The steel market is expected to grow at a 3.5% CAGR to $1.43 trillion by 2028. So, both NUE and CLF should benefit.
While CLF’s shares have declined 8.2% in price over the past nine months, NUE has surged 32%. NUE is also a clear winner with 9.1% gains versus CLF’s negative returns over the past month. But which of these stocks is a better pick now? Let’s find out.
Latest Developments
On Feb. 3, 2022, NUE completed the acquisition of California Steel Industries, Inc. (CSI), a steel processing and finishing company, by purchasing a 50% equity interest from Brazilian mining company Vale S.A. (VALE) subsidiary, as well as a 1% equity ownership stake from Japanese steel manufacturer JFE Steel Corporation. This joint venture should help NUE gain a strong presence in the Western region and enhance its ability to produce an even wider range of value-added sheet products, and serve customers in the construction, service center, and energy industries.
On Nov.18, 2021, CLF completed the acquisition of Ferrous Processing and Trading Company (FPT), one of North America's premier processors, buyers, sellers, and recyclers of scrap metals of all kinds, and will operate as CLF’s wholly owned subsidiary going forward. This acquisition will enable CLF to grow its presence in the scrap business.
Recent Financial Results
For its fiscal 2021 fourth quarter, ended Dec. 31, 2021, NUE’s net sales increased 97% year-over-year to $10.36 billion. The company’s EBIT came in at $3.01 billion, up 1281.2% from the prior-year period. Its net earnings were $2.25 billion, indicating a 44.4% year-over-year improvement. NUE’s EPS increased 513.1% year-over-year to $7.97. The company had $2.36 billion in cash and cash equivalents as of Dec. 31, 2021.
CLF’s sales for its fiscal year 2021 fourth quarter, ended Dec. 31, 2021, increased 137% year-over-year to $5.35 billion. The company’s operating income came in at $1.12 billion, representing a 945.8% year-over-year improvement. Its net income was $893 million for the quarter, representing a 1295.3% rise from the year-ago period. CLF’s adjusted EPS increased 1107.1% year-over-year to $1.69. As of Dec. 31, 2021, the company had $48 million in cash and equivalents.
Past and Expected Financial Performance
NUE’s net income and EPS have increased at CAGRs of 42.5% and 46.1%, respectively, over the past three years.
Analysts expect NUE’s EPS to rise 7.8% year-over-year in its fiscal year 2022 second quarter, ending June 30, 2022. Its revenue is expected to grow 19.9% year-over-year in the same quarter. And the company’s EPS is expected to grow at a 37.8% rate per annum over the next five years.
In comparison, CLF’s net income and EPS have grown at CAGRs of 38.4% and 16.1%, respectively, over the past three years.
CLF’s EPS is expected to rise 1.3% year-over-year in its fiscal year 2022 second quarter, ending June 30, 2022. Its revenue is expected to grow 6.4% year-over-year in the same quarter. And analysts expect the stock’s EPS to grow at a 27.4% rate per annum over the next five years.
Valuation
In terms of forward EV/EBITDA, NUE is currently trading at 4.36x, which is 23.5% higher than CLF’s 3.53x. And in terms of forward EV/Sales, CLF’s 0.78x compares with NUE’s 1.02x.
Profitability
NUE’s trailing-12-month revenue is almost 2.3 times CLF’s. NUE is also more profitable, with a 30.2% gross profit margin versus CLF’s 22.2%.
Furthermore, NUE’s 27.9%, 18.7%, and 9.5% respective EBITDA, net income, and levered free cash flow compare with CLF’s 25.3%, 14.6%, and 3.6%, respectively.
POWR Ratings
While NUE has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, CLF has an overall C grade, equating to a Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both NUE and CLF have a B grade for Growth. NUE’s trailing-12-month EBITDA has grown 321.4% over the past year, while CLF’s has increased 1567.7% during the period.
Both NUE and CLF have a B grade for Quality, which is consistent with their higher-than-industry profitability ratios. NUE’s 27.9% trailing-12-month EBITDA margin is 31.1% higher than the 21.3% industry average. And CLF has a 25.3% trailing-12-month EBITDA margin, which is 18.8% higher than the 21.3% industry average.
Among the 35 stocks in the A-rated Steel industry, NUE is ranked #17, while CLF is ranked #27.
Beyond what we have stated above, our POWR Ratings system has also rated NUE and CLF for Value, Sentiment, Stability, and Momentum. Get all NUE ratings here. Also, click here to see the additional POWR Ratings for CLF.
The Winner
The bipartisan infrastructure bill is expected to help steelmakers NUE and CLF. However, its higher profitability we think makes NUE a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Steel industry.
NUE shares were trading at $123.90 per share on Friday afternoon, up $2.96 (+2.45%). Year-to-date, NUE has gained 8.54%, versus a -8.10% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
Nucor vs. Cleveland-Cliffs: Which Steel Stock is a Better Buy? StockNews.com
