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Nucor Poised on Auto Momentum, Expansion Amid Headwinds

On May 20, we issued an updated research report on steel giant NucorNUE .

Nucor's earnings for first-quarter 2016 missed the Zacks Consensus Estimate. Revenues fell by double digits year over year on lower pricing, but beat expectations. The company expects improved earnings in the second quarter on a sequential comparison basis.

The company expects improved performance in its Steel Mills division in the second quarter vis-à-vis the first quarter on price hikes for many of its products. Nucor also expects higher profits in its Downstream Products unit in the second quarter compared to the first as better weather conditions are expected to benefit non-residential construction markets. For the Raw Materials segment, the company expects an improvement in performance in the second quarter.

Nucor continues to see strength in the automotive market. Demand from this key end-market (especially for the company's sheet steel products) remains healthy, reflected by contract awards by automotive OEM customers. Nucor's volumes in the automotive market climbed roughly 20% sequentially in the first quarter. The company remains focused on achieving greater penetration of this major market in 2016.

Nucor also remains committed to expand its higher margin product portfolios and improve its cost structure. Nucor's Louisiana direct reduced iron ("DRI") facility came online in Dec 2013 and is expected to produce 2.5 million tons of DRI annually.

In addition, sheet piling production capabilities expanded at Nucor-Yamato structural steel following the completion of a roughly $115 million expansion project. The Nucor-Yamato joint venture is expected to continue to grow its share in the steel pilings market over the next few years. The joint venture remains focused on broadening its value-added offerings.

Moreover, the acquisition of Gallatin Steel Company has reinforced Nucor's foothold in the key Midwest market (the biggest flat-rolled consuming region in the U.S) and allowed it to better serve its flat-rolled customers in the growing pipe and tube segment.

However, weak steel market fundamentals continue to weigh on Nucor's prospects. Steel market conditions remain soft in the U.S.

Despite some favorable developments on the import front in the recent past (in the form of imposition of heavy tariffs on imports), the U.S. steel industry still remains under the risk of cheaper imports. Notwithstanding the U.S. steel industry's low capacity utilization, imports continue to flow into the domestic market due to foreign producers' overcapacity.

China, which accounts for around half of global steel output, continues to pose a threat to the steel industry. The country's steel exports jumped 7.6% year over year in the first four months of 2016 (per customs data), signalling continued demand weakness at home.

Imports and oversupply in the industry are pressurizing steel prices, thereby affecting margins of U.S. steel producers, including Nucor.

Moreover, demand for steel is expected to remain subdued in energy markets in the near term given the depressed oil pricing environment. While non-residential construction activities are improving, the market remains below its peak levels. Weakness also continues across heavy equipment and agricultural markets.

Nucor currently sports a Zacks Rank #3 (Hold).

Stocks to Consider

Better-ranked companies in the steel space include Ryerson Holding Corporation RYI , ArcelorMittal MT and Olympic Steel Inc. ZEUS . While Ryerson Holding holds a Zacks Rank #1 (Strong Buy), both ArcelorMittal and Olympic Steel carry a Zacks Rank #2 (Buy).

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ARCELOR MITTAL (MT): Free Stock Analysis Report

NUCOR CORP (NUE): Free Stock Analysis Report

OLYMPIC STEEL (ZEUS): Free Stock Analysis Report

RYERSON HOLDING (RYI): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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