Nucor (NUE), a leading steel company in the United States, primarily uses scrap steel as its raw material. The stock has soared over the past five years due to Donald Trump’s steel import tariffs, which limited foreign competition. Additionally, excessive U.S. stimulus caused steel prices to spike in 2021, further boosting the stock. Nucor’s current profitability relies on these tariffs, which will be a key focus as the U.S. election approaches. The stock also has a significant valuation premium compared to foreign companies like Ternium S.A. (TX). Consequently, I’m neutral on Nucor.
The Outlook for Tariffs Amid a U.S. Election
Donald Trump’s 25% tariffs on steel imports in 2018 proved to be a major boon for Nucor, and Joe Biden largely continued this policy throughout his term in office. With Biden now dropping out of the presidential race, it remains to be seen if his replacement will continue such a policy. The continuation of these tariffs is both good for U.S. national defense and bad for the fight against inflation. I believe that if Donald Trump were to be elected again, it would be bullish for Nucor, as Trump is likely to continue his protectionist policies.
Steel Prices May Be Bottoming
HRC steel prices have dropped significantly since the beginning of 2024, reaching levels last seen in 2010 and 2011. Given the astronomical amount of money that has been printed globally since then, one would expect steel prices to be much higher. Additionally, all the capital expenditures (CapEx) that steel companies have spent on decarbonization could structurally increase steel prices.
However, a downturn in China has created some excess supply. Recently, tariffs have led China to redirect its steel supply toward electric vehicle manufacturing. If China’s economy makes a comeback, steel prices may rebound.
I see some bullish trends emerging that could bolster global steel demand. The transition to green energy, such as wind and solar power, and the rise of electric vehicles both require substantial amounts of steel. Additionally, global conflicts are driving governments to increase spending on military equipment, including tanks, aircraft, and infrastructure, all of which rely heavily on steel. War-torn countries like Ukraine will eventually need to be rebuilt, further boosting steel demand. These trends create a seemingly constant and urgent demand for steel, which, combined with limited supply, can translate into higher steel prices. Increased demand puts upward pressure on prices, especially when supply is unable to keep pace.
There are also numerous emerging markets that are far from finished expanding and building, which will require substantial amounts of steel. In North America, the trend toward nearshoring manufacturing capacity—moving production closer to end markets—benefits local steel producers like Nucor by increasing demand for domestically produced steel.
On the supply side, steel companies are expected to cut back on capacity expansion in response to lower prices, with many global players struggling to cover their high costs and operating with thin profit margins. These so-called marginal producers are more vulnerable to financial difficulties and may be forced out of business if low prices persist, which would naturally reduce the overall steel supply.
Nucor’s Buybacks and Production Capacity Expansion
If we examine Nucor’s cash flow statements, we can see that the company has been spending significantly more on capital expenditures than on depreciation and amortization in recent years. This likely indicates that Nucor has been aggressively expanding its production capacity. However, this could come back to bite Nucor if steel prices remain low or if supply exceeds demand in the U.S., which, despite having one of the highest GDPs per capita in the world, has limited room for growth.
Moreover, Nucor spent large amounts on buybacks (repurchasing common stock) over the past few years, after the stock had risen significantly. In contrast, the company spent very little on share repurchases in 2019 and 2020, when its shares were cheaper. If the stock price falls, this recent spending on buybacks could prove to be wasted capital. Generally, I prefer to see companies pay out special dividends during industry booms and buy back stock during downturns.
Nucor’s Strong Fundamentals
Despite some potential capital allocation issues, Nucor remains a very solid company. It can adjust wages during downturns and pass on raw material price increases to customers through flexible contracts. As a result, Nucor rarely loses money in any given year.
The company also has a tremendous balance sheet, awash with cash, a great current ratio, and manageable debt. This should allow it to easily navigate any steel price weakness.
Nucor’s Profitability
Steel companies are commodity businesses, which makes it very difficult for them to maintain a high return on assets (ROA). As a result, their profits often revert to the mean, typically drifting toward a 5% return on assets. Nucor had an ROA of around 5% from 2014 to 2020 but has since experienced a significant spike in profitability. I believe this is partly due to U.S. steel tariffs and Joe Biden’s infrastructure-friendly bills. For long-term shareholders, the key question is, “Will these conditions persist ten years from now?” I think the answer is “probably not.”
Why I Prefer Ternium S.A.
When it comes to steel companies, I prefer some of the foreign names that trade at a significant discount compared to U.S. companies like Nucor. One such company is Ternium S.A. (TX), which has a forward P/E ratio of 4.76x and a price-to-book ratio of 0.54x. Headquartered in Europe, Ternium operates in South America—a region with considerable turmoil and potential—as well as Central America and Mexico. The company has a similar track record to Nucor in terms of rarely losing money and also boasts a robust balance sheet. On a valuation basis, Nucor’s stock is about three times more expensive than Ternium’s, with a forward P/E ratio of 15.64x and a price-to-book ratio of 1.82x.
Is NUE Stock a Buy or Sell?
Analysts remain cautiously optimistic about NUE stock, with a Moderate Buy consensus rating based on five Buys and five Holds. The average NUE stock price target is $188.75, implying upside potential of 20.21%. Analyst price targets range from a low of $170 per share to a high of $240 per share.
The Bottom Line on NUE Stock
Nucor is a fundamentally strong company, but its long-term performance will depend on the future for U.S. steel tariffs. If these tariffs eventually fade away, and they should, Nucor’s return on assets and profitability could meaningfully decline. This could expose the company’s top-of-cycle expansion and buybacks. Despite these concerns, I am bullish on steel prices (after the recent selloff) and on Nucor’s ability to weather a downturn.
