Nucor Stock Earnings Riding the Steel Industry Wave

Key Points

• First-quarter manufacturing earnings are on watch as companies like Nucor give mixed signals. 
• Within the trends, investors can find the true momentum behind the industry and why Nucor's business could push higher. 
• Analysts see double-digit upside, and markets are willing to pay a premium for future revenues; here's why.

After outperforming the Industrial Select Sector SPDR Fund NYSEARCA: XLI by more than 15% over the past five months, shares of Nucor Co. NYSE: NUE have now fallen behind the sector after reporting its first quarter 2024 earnings, arguably the most important earnings for the year as they set the tone for the stock. 

Even though the quarterly results were far from stellar, analysts continue to see this stock as a leader that could outperform the market in the coming months. The industrial and manufacturing sector in the United States remains a focal point for traders and investors this year. 

Other industry players, such as Steel Dynamics Inc. NASDAQ: STLD, have also experienced bearish price action after reporting earnings, with this one down almost 3% on results. 

It’s a Manufacturing Year

After more than a year of contracting, the ISM Manufacturing PMI Index pushed its first month of expansion in March, following a breakout thesis set out by Goldman Sachs analysts. In its 2024 macro outlook report, the investment bank told Main Street to watch out for increased profits and activity in the sector.

So far, it’s been proven right, as February’s PMI reported a 6.4% jump in export orders, backed by the belief of coming interest rate cuts by the Federal Reserve (the Fed). According to data from the CME's FedWatch tool, the Fed is expected to initiate these proposed cuts by September 2024.

Interest rate cuts could lower the dollar's value in the currency markets, making American exports, like steel, more attractive.  Even foreign companies could be after U.S. steel-makers -- in fact, Japan’s Nippon Steel Co. OTCMKTS: NISTF recently made a takeover bid for United States Steel Co. NYSE: X 

More than that, the Biden administration took measures to increase steel and aluminum production within the United States, boosting jobs and corporate activity in the sector. Now that the fundamental macro trend is set for the steel industry, here is why Nucor’s earnings weren’t actually that bad. 

It’s a Bottoming Markets Want to Buy

Nucor’s price-to-sales (P/S) ratio commands a 50% premium compared to the steel mills industry. Willing to pay 1.2x Nucor’s sales over the industry’s average 0.8x gives investors a gauge into future market sentiment. There must be a reason markets would be willing to overpay for the company’s sales over its peers, and the answer may lie in its financials.

In the first quarter earnings press release, investors will notice a shift from the year-on-year trend to the quarter-on-quarter trend. Sales declined 7% in the past year but rose 6% over the quarter. This makes sense after investors revisit the contractionary periods in the manufacturing PMI, justifying the quarterly sales breakout as the sector pivoted back into expansion.

Steel prices are 17% lower than a year ago, though the past month reflects a rally of 7.8% as a sign of a bottoming industry. Commodity-dependent stocks tend to move with the underlying commodity’s cycle, and most on Wall Street can agree this time, it’s Nucor’s bottom. 

The company’s management agrees that the stock is on the cheaper end and is set to surprise markets with a potential uptrend soon. This can be proved by the $1 billion allocated to share buybacks in the first quarter, representing close to 2.5% of the company’s market capitalization. 

Wall Street’s Vote

By boosting their price targets to $240 a share, Citigroup analysts call for a net upside of 40% from today’s prices. The recent selloff in the stock comes as investors focus on the 22.2% annual decline in earnings per share (EPS) when they should focus on the 9.5% jump over the quarter instead. 

Despite the negative sentiment on these recent earnings, bears have decided to leave this stock alone. Over the past month, Nucor stock’s short interest declined by 4.3%, bringing the net percentage of short shares down to 2%. 

United States Steel stock trades at only 73% of its 52-week high, even after talks of being bought out, and is arguably one of the biggest steel exporters in the U.S. On the other hand, Nucor stock trades at 85% of its 52-week high, giving investors the final bullish vote through price action.