US Steelmaker Poised For Steady Upside: Technicals Key

Our view that Nucor would remain an outperformer in the US steel industry, which we initially discussed in mid-February 2014 (see 'Nucor Set To Be Outperformer In Problematic Industry,' February 11, 2014) is supported by Nucor's recently released Q114 earnings. We expect this trend to continue in 2014 based on the following factors:

  • The company remains broadly exposed to the US automotive, machinery, and housing sectors. Our industry teams hold positive views towards these sectors' growth prospects over 2014.

  • Nucor retains a lower cost structure than competitors such as US Steel and AK Steel, an important differentiating trait given overcapacity and subdued prices will continue to weigh on the broader steel industry. Nucor's gross, operating, and profit margins have consistently outperformed the latter two.

  • The share price remains in a multi-year uptrend dating back to Q411, with momentum suggesting that continued upside is possible. However, key technical resistance makes a continuation of Nucor outperformance over the coming weeks unclear, meaning that we will look for a more convincing technical picture to emerge.

Positive Earnings Reflect Strong Fundamentals

Nucor's Q114 financial results, released on April 24, reaffirm our view that the firm will see relative outperformance over a multi-quarter time horizon due to its diversified industry exposure across sectors of the US economy on which we hold constructive views. The company reported that net income rose to USD111.0mn from USD84.8mn in Q1 2013 on the back of a 10.9% increase in sales to USD5.1bn over the same period. Indeed, total shipments from the company's steel mills increased 7.0% y-o-y, while downstream steel products shipments rose even greater at 13.0%.

Despite Recent Residential Slowdown, Positive Outlook Remains
US - Durable Good Orders (LHS) & Private Housing Starts (RHS)

Our view that Nucor would remain an outperformer in the US steel industry, which we initially discussed in mid-February 2014 (see 'Nucor Set To Be Outperformer In Problematic Industry,' February 11, 2014) is supported by Nucor's recently released Q114 earnings. We expect this trend to continue in 2014 based on the following factors:

  • The company remains broadly exposed to the US automotive, machinery, and housing sectors. Our industry teams hold positive views towards these sectors' growth prospects over 2014.

  • Nucor retains a lower cost structure than competitors such as US Steel and AK Steel, an important differentiating trait given overcapacity and subdued prices will continue to weigh on the broader steel industry. Nucor's gross, operating, and profit margins have consistently outperformed the latter two.

  • The share price remains in a multi-year uptrend dating back to Q411, with momentum suggesting that continued upside is possible. However, key technical resistance makes a continuation of Nucor outperformance over the coming weeks unclear, meaning that we will look for a more convincing technical picture to emerge.

Positive Earnings Reflect Strong Fundamentals

Nucor's Q114 financial results, released on April 24, reaffirm our view that the firm will see relative outperformance over a multi-quarter time horizon due to its diversified industry exposure across sectors of the US economy on which we hold constructive views. The company reported that net income rose to USD111.0mn from USD84.8mn in Q1 2013 on the back of a 10.9% increase in sales to USD5.1bn over the same period. Indeed, total shipments from the company's steel mills increased 7.0% y-o-y, while downstream steel products shipments rose even greater at 13.0%.

Despite Recent Residential Slowdown, Positive Outlook Remains
US - Durable Good Orders (LHS) & Private Housing Starts (RHS)

Among the firm's top customers are heavy machinery makers, including Caterpillar and Deere & Co, consumer durable goods producers Whirlpool and Electrolux, and auto manufactures Nissan and BMW. Regarding machinery makers, we expect Caterpillar to benefit from continued construction activity in the US and Asia, while reversing fortunes in Europe present further opportunity. While we expect Deere's sales growth will remain weak, we anticipate the company will outperform the broader agricultural machinery sector. On consumer durable goods producers, we note that while we see slower but positive growth in residential construction over 2014, we expect the sector to remain a net positive contributor to real GDP this year. While y-o-y growth of new housing permits issued has slowed from recent highs in 2013, growth remains positive and we expect it to remain so through 2014. Furthermore, our view for overall economic growth and private consumption to pick up should further support consistent demand for consumer durables. Finally, we maintain our bullish view towards US automotive production, which we forecast to grow at 2.8% for 2014, and average 2.9% y-o-y growth through 2018.

But Technicals Bear Watching

Our positive view towards Nucor's fundamentals and the firm's strong Q114 financial results suggest further equity upside remains in the cards. While the share price has trended higher over the past several weeks, we caution that the technicals, while positive, do not conclusively indicate the share price will head higher. In mid-February we noted that Nucor's share price had the potential to surpass USD50 per share, due to both technical and fundamental factors at the time, and since then the share price has largely traded in the low-50s range after holding trendline support.

Within A Broader Uptrend
US - Nucor Share Price, USD & MACD (Weekly Chart)

Yet Nucor's share price is approaching key resistance around USD54.00, a break of which would be a bullish signal. Indication of a crossover on the moving average convergence/divergence (MACD) could suggest a bullish trend reversal is underway. However, we will wait for confirmation of a technical break higher before having more conviction of the future trajectory of Nucor's share price.

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This article is tagged to:
Sector: Commodities, Metals
Geography: United States
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