One of Wall Street's biggest winners of the day is Nucor, a steel company whose shares have climbed 4.3% to a price of $147.55 -- 9.47% below its average analyst target price of $162.98.
The average analyst rating for the stock is buy. NUE may have outstripped the S&P 500 index by 4.0% so far today, but it has lagged behind the index by 44.4% over the last year, returning -5.0%.
Nucor Corporation engages in manufacture and sale of steel and steel products. The company is part of the industrials sector, which is considered cyclical. This means that sales revenues, and to some extent share prices, tend to increase during economic booms and then fall back to earth during busts. However, industrial companies can dampen this cyclical effect if they are invovled in multiple industries.
Nucor's trailing 12 month P/E ratio is 14.2, based on its trailing EPS of $10.38. The company has a forward P/E ratio of 15.8 according to its forward EPS of $9.36 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2024, the industrials sector has an average P/E ratio of 25.42, and the average for the S&P 500 is 29.3.
The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.
When we divide Nucor's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of -2.22. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing NUE's growth potential .
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Nucor's last four annual reports, we are able to obtain the following rundown of its free cash flow:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 7,111,931 | 2,214,157 | 4,897,774 | -39.71 |
| 2022 | 10,072,054 | 1,947,897 | 8,124,157 | 76.28 |
| 2021 | 6,230,776 | 1,621,989 | 4,608,787 | 299.49 |
| 2020 | 2,696,877 | 1,543,219 | 1,153,658 | -13.4 |
| 2019 | 2,809,413 | 1,477,293 | 1,332,120 | -5.62 |
| 2018 | 2,393,952 | 982,531 | 1,411,421 |
- Average free cash flow: $3.59 Billion
- Average free cash flown growth rate: 29.0 %
- Coefficient of variability (the lower the better): 0.0 %
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 1.5% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.
Nucor has a P/B ratio of 1.7. This indicates that the market value of the company exceeds its book value by a factor of more than 1, but is still below the average P/B ratio of the Industrials sector, which stood at 3.2 as of the third quarter of 2024.
Nucor is by most measures undervalued because it has a Very low P/E ratio, a lower P/B ratio than its sector average, and generally positive cash flows with an upwards trend. The stock has mixed growth prospects because it has a an inflated PEG ratio and strong operating margins with a positive growth rate. We hope you enjoyed this overview of NUE's fundamentals.
