Falling -11.8% to a price of $120, Nucor stood out as one of the biggest losers of the day. It was a rough session for the basic materials and energy sectors in particular as ongoing fears of worsening economic conditions sparked a sell off. Shares of the steel company whose shares have underperformed the S&P 500 index by -11.4% as of today's afternoon session, but outpaced it by 36.4% over the last year with a return of 24.1%.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the second quarter of 2022, the basic materials sector has an average P/E ratio of 8.77, and the average for the S&P 500 is 15.97.
Nucor's trailing 12 month P/E ratio is 3.7, based on its trailing Eps of $32.33. The company has a forward P/E ratio of 9.9 according to its forward Eps of $12.15 -- which is an estimate of what its earnings will look like in the next quarter.
Earnings are the most widely used metric for understanding a stock's valuation. When considered alongside the company's revenue growth, they can also give insight into the company's margins, which in turn can allow us to make inferences about its possible competitive advantages. Nucor's year on year (YOY) quarterly earnings grew at a rate of 91.8% and its YOY quarterly grew at a rate of 34.2%.
Since the earnings growth rate is higher than the revenue growth rate, we can deduce that the company's profit margins are widening. Companies can increase their earnings at a faster rate than their revenue by reducing their tax liability, raising prices, or cutting their overhead or the cost of goods sold.
Unlike earnings, gross profits are the company's revenue minus the cost of goods only, and don't take into account taxes and overhead. Analyzing gross profit margins as opposed to net (operating) margins gives a better picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack therefor. NUE has gross profit margins of 33.8%, from which we can infer that its competitive advantage is probably not absolute, and is facing some pricing pressure from other companies within the same market.
The revenues and earnings related to sales are only a part of the financial puzzle of large corporations, which have many costs and expenses arising independently from their core business: cost of maintaining debt, rent payments, return on capital investments, depreciation, etc. When all of these separate cash flows are taken into account, we are left with the company's levered free cash flow, which for Nucor is $4,939,192,320. With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in NUE have received an annualized dividend yield of 1.4% on their capital.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Nucor's P/B ratio is 1.9 -- in other words, the market value of the company exceeds its book value by a factor of more than 1, so the company's assets may be overvalued compared to the average P/B ratio of the Basic Materials sector, which stands at 1.85 as of the second quarter of 2022.
As of second quarter of 2022, Nucor is possibly undervalued because it has a very low P/E ratio, decent profit margins, an analyst consensus of some upside potential, and strong cash flows. Its P/B ratio is somewhat high relative to the rest of the Basic Materials Sector, however. We hope this preliminary analysis will encourage you to do your own research into NUE's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
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