Analysis: NUE

Shortly before the closing bell, we will be initiating a position in Nucor (NUE) , buying 350 shares at roughly $106.48. Following the trade, NUE will represent 0.98% of the portfolio.

We are bringing NUE out of the Bullpen this afternoon and adding a position to the portfolio. You can read our initial Bullpen Alert on the company here.

Nucor is the largest steel producer in the United States, primarily serving commercial, municipal construction and industrial markets. The company operates in three major segments: steel mills, steel products and raw materials. Nucor is also the largest metals recycler in North America.

The steel mills segment produces and distributes a range of products including sheet steel, plate steel, structural steel and bar steel. The steel products division manufactures a range of products including steel joists and joist girders, steel deck, fabricated concrete reinforcing steel, cold finished steel, steel fasteners, metal building systems and wire/wire mesh. The raw materials group processes and brokers ferrous and non-ferrous metals as well as producing direct-reduced iron and natural gas.

The steel industry has been a focus of investors since the election as President Biden's expected infrastructure spending policies are likely to infuse growth for the country's major operators. Additionally, steel producers have enjoyed an incredible pricing environment this year because the surge in demand coming out of the pandemic, combined with the easily absorbed capacity growth has created a very tight environment. Not only has this pushed commodity prices higher, but it has also sent Nucor's earnings soaring.

Those who watch Mad Money may be familiar with Nucor as Jim most recently hosted CEO Leon Topalian for an "Executive Decision" segment back in April to discuss the company's record quarterly earnings report. You can watch the conversation at the link here.

We also think a very shareholder friendly capital return story is about to pick up here. Nucor offers a solid 1.52% dividend yield and that's just okay, but if you know the company well then you know they have a history of returning a lot of capital to shareholders when times are good. And it is a great time to be a steelmaker.

Shareholders got a taste of this last month when the company announced its Board approved a new share repurchase program worth up to $3 billion. But according to analysts at BMO Capital Markets, this was likely the first of many "significant" capital returns from the group.

"Within the context of our ongoing higher-for-longer view towards underlying prices, the U.S. steel produces are poised to generate record-high results and free cash flow," BMO wrote. "With well-defined capital spending programs and meaningfully improve balance sheets, in our view much of this cash generation has the potential to be returned to shareholders via buybacks and/or special dividends."

In addition to capital returns, bolt-on acquisitions are another way management can strategically use cash. Earlier this morning, Nucor announced it will acquire Cornerstone Building Brands' insulated metal panels (IMP) business for a cash purchase price of $1 billion. Nucor paid a steep price for this business at roughly 10x pre-pandemic EBITDA, and the cash spent on this deal means less will be available to be returned to shareholders. However, the strategic benefits are clear, with demand for IMP products expected to grow at a double-digit annual growth rate through this decade, "driven by evolving consumer preferences regarding e-commerce and grocery delivery, as well as the expansion of data centers and server farms which all require temperature-controlled climates," according to Nucor.

We are initiating the position with a $120 price target, reflecting slightly less than 6x EV/EBITDA multiple on consensus 2021 estimates. That being said, we think the EBITDA estimates are too low and don't fully reflect the pricing gains Nucor has experienced this year.

Clearly, we are not early to the Nucor party here with the stock around at a double year-to-date. But we are starting off very small here to protect us from future volatility, and we welcome weakness as long-term buying opportunities because historically when the Steelcos get going, we tend to see a multiyear move. That's why we think the run here is not over.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, has no positions in the stocks mentioned.