Analysis: NUE

On Thursday, before the opening bell, Nucor (NUE) reported a solid top and bottom line beat with its second quarter results.

Revenue of $8.79 billion (+25% QoQ) exceeded estimates of about $8.25 billion while earnings per share of $5.04 (up from $3.10 in the first quarter and $0.36 YoY) was a record for the company and beat estimates of $4.79. Included in earnings was a $42 million, or $0.11 per share, non-cash impairment charge related to Nucor's leasehold interest in unproved oil and natural gas properties.

Nucor's impressive earnings result was also stronger than the $4.60 to $4.70 per share range the company pre-announced back in June in the press release here. Beating a preannouncement by this much is a classic example of under-promising and over-delivering. It also further demonstrates how robust of a steel pricing environment the company is currently enjoying. As evidence, Nucor's average sales price per ton in the second quarter increased 20% from the first quarter and nearly doubled from the second quarter of 2020. Nucor's average sales prices are increasing faster than the average scrap and scrap substitute cost per ton, which increased 13% from the first quarter to $405.

By segment, earnings before income taxes and non-controlling interests were $2.174 billion in steel mills, representing growth of 339% QoQ. Earnings from steel products was $259 million, up 38% QoQ. Both of these results are new records for the second quarter. Elsewhere, raw materials earnings were $120 million, up 124% QoQ. Lastly, corporate/elimination represented a loss of 529 million.

Taking a look at shipments within steel mills, total shipments was 6.734 million, representing growth of 3% QoQ and 41% YoY. Sheet shipments increased 46% YoY to 2,913 million, while bars shipments grew 40% YoY to 1.731 million. Elsewhere, shipments in structural increased 32% to 681,000, while plate grew 37% YoY to 599,000, and other increased 46% to 118,000.

Nucor shipped 7.482 million tons to outside customers in quarter of 2021, representing growth of 4% sequentially and 37% over last year's second quarter.

Nucor's operating rates improved as well. Overall operating rates at the steel mills increased to 97% in the quarter, up from 95% in the first quarter and 68% last year.

Management also provided an update on the $3 billion share repurchase program announced in May. During the second quarter, Nucor repurchased approximately 6.8 million shares at an average price of $90.80. The company still has approximately $2.8 billion remaining under its current authorization, leaving management with plenty of dry powder to buy on dips.

Supporting Nucor's capital return programs and recent acquisition strategy is the robust free cash flow. The company generated $964 million of free cash flow in the quarter. That was a hair below estimates of $976 million but significantly up from the first quarter's $217 million result.

Looking ahead to the third quarter, Nucor's recent run of record results is expected to continue. Nucor expects earnings to be the highest quarterly earnings in company history, meaning we should see profits increase over the second quarter's $5.04 level. Management cited improved pricing and margins in the steel mills segment as the primary driver. Additionally, Nucor expects to see profitability across the steel mill segment improve, with the largest gains coming from steel mills. Furthermore, the steel products segment and raw material segment are both expected to grow earnings over the second quarter.

With consensus third-quarter earnings per share expectations sitting at $5.55 ahead of this print, we think it is very likely that estimates will be raised even higher for Nucor.

Management will discuss the quarterly results later this afternoon on the 2:00 pm EST conference call. We'll look for management to discuss the sustainability of a higher for longer pricing environment and some of the demand drivers that factor into their view.

Also, we'll look for some more color around Nucor's recent acquisition spree. In June, the company announced it will acquire Cornerstone Building Brands' insulated metal panels business for a purchase price of $1 billion. And just the other day, Nucor announced it will purchase Hannibal Industries, a leading national provider of racking solutions to warehouses, for $370 million.

Regarding the stock reaction, it has been a mixed day for the broader markets, but NUE is a slight outperformer on the day as the encouraging third-quarter outlook means estimates will be forced higher. More importantly, the results here were consistent with that pre-announcement, and a strong conference call that points to sustainable industry trends will be the key to improving sentiment.

We reiterate our One rating and we continue to recommend shares here off the stock's recent 15% pullback from its highs.

Conference Call Information:

Time: 2:00 pm EST

Webcast, here.