Nucor Shares Are Climbing Today - Are They Overvalued?

Shares of Nucor (NUE) jumped 0.3 % during today's afternoon session, bringing their 52 week performance to 11.0%. The stock seems to be undervalued in terms of traditional metrics, but in this day in age, we believe that a complete stock analysis should also take into account the company's strong growth indicators and mixed market sentiment.

Nucor Corporation engages in manufacture and sale of steel and steel products. The large-cap Industrials company is based in Charlotte, United States and has 31,400 full time employees.

NUE's P/E Ratio Is Better Than the Sector Average

Compared to the Industrials sector's average of 20.49, Nucor has a trailing twelve month price to earnings (P/E) ratio of 8.6 and an expected P/E ratio of 14.1. P/E ratios are calculated by dividing the company's share price by its trailing 12 month or forward earnings per share, which stand at $19.77 and $12.11 respectively.

Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Nucor's P/E ratio is lower than its sector average, we can deduce that the market is undervaluing the company's earnings.

Nucor Has a Negative Rate of Expected Growth

P/E ratios are falling out of favor as a means of valuing stocks for a number of reasons. Earnings are subject to manipulation, and the P/E ratio is static in time, in the sense that it doesn't take into account expected long term growth of the company. Although estimated long terms growth rates are just as easily manipulable as earnings, dividing Nucor's P/E ratio by its expected growth rate can tell us the relative market valuation of the company in relation to expected earnings growth.

The resulting metric, called price to earnings growth (PEG) is -1.26 for Nucor. Since the PEG ratio is negative and the company's reported earnings per share are positive, we can deduce that the company's expected growth rate is negative. Needless to say, this is a red flag for investors with a long term horizon.

NUE Has an Average P/B Ratio

Traditionally, stock pickers used to focus primarily on finding issues that were trading significantly below their tangible asset value, to guarantee themselves a margin of safety. But such an approach would screen out many valuable securities because many profitable businesses -- especially those that heavily leverage information technology -- simply do not have many tangible assets compared to more capital intensive companies.

Therefore, modern value investors tend to focus less on absolute price to book value (P/B) ratios. Instead of singling out stocks with a P/B ratio of less than 1, they will compare the target company against its peer group. For Nucor, the P/B value is 2.05 while the average for the Industrials sector is 3.78.

NUE's Weak Cash Flow Generation Is Troubling

The table below shows that Nucor is not generating enough cash. A well run company will generally have cash flows that reflect the strength of its underlying business, and in Nucor's case, free cash flow is growing at an average rate of 27.7% with a coefficient of variability of 246.3%. We can also see that cash flows from operations are evolving at a 22.6% rate, versus 12.7%:

Nucor Is Not a Profitable Business

If you are looking to make NUE a long term investment, its weak margins may give you cause for concern. As you can see from the below, the company is generally losing money on each sale it makes. That being said, stock prices in the short term can be independent of a company's margins, and Nucor's management may be able to make the business profitable in the future.

Nucor's Gross Margins

Nucor's Operating Margins

Nucor's cost of revenue is growing at a rate of 4.6% in contrast to None% for operating expenses. Sales revenues, on the other hand, have experienced a 6.1% growth rate. As a result, the average gross margins growth is 5.8 and the average operating margins growth rate is 6.4, with coefficients of variability of 408.6% and 1583.4% respectively.

We See Mixed Market Signals Regarding NUE

Nucor has an average rating of buy and target prices ranging from $190.0 to $39.0. At its current price of $170.41, the company is trading 7.34% away from its target price of $158.75. 2.9% of the company's shares are linked to short positions, and 81.5% of the shares are owned by institutional investors.