Reuben Gregg Brewer, The Motley Fool
5 min read
In This Article:
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Nucor is one of the largest steelmakers in the United States.
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Steel is a cyclical business, prone to deep downturns during periods of economic concern.
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Nucor's stock has fallen by more than 45% from its peak, but it may have hit an inflection point.
Nucor (NYSE: NUE) is a large and diversified U.S. steelmaker. Despite being conservatively run, the company can't avoid the cyclical nature of the industry in which it operates. No amount of diversification or financial strength can change steel demand trends or market-driven steel pricing. With its industry weak right now, Nucor's stock has fallen dramatically from its recent highs. But for investors, that could present an attractive long-term opportunity.
Nucor makes steel and manufactures fabricated steel products. It is one of the largest and most diversified U.S. steel companies. There are two key nuances that investors ought to be aware of here. First, Nucor's infrastructure is built entirely around electric arc mini-mills. These facilities use electricity to recycle scrap steel into "new" steel. That technology is, to simplify things, more flexible than older blast-furnace technology, which uses iron ore and metallurgical coal to make primary steel.
Blast furnaces can be very profitable when operated at high utilization rates. So during the industry's upturns, companies like United States Steel and Cleveland-Cliffs, which both make heavy use of blast furnaces, can practically mint money. But when steel demand and prices fall, those companies often bleed red ink. Because of the flexibility of Nucor's electric arc mini-mills, it can maintain profitability through all but the worst industry downturns.
On top of this strong core, Nucor has built a business creating products with the bulk steel it produces. It produces things such as building components, computer racks for data centers, and even many of the vital parts needed to support the electrical grid. In short, Nucor to takes the commodity it produces and turns it into higher-margin products that often have more sustainable demand throughout all parts of the steel cycle. All told, Nucor is likely one of the best-run steel mills in the United States, if not the world.
But, to reiterate, no steel company can entirely avoid the cyclical nature of its industry. So Nucor's stock tends to swing between periods of material price advances and material price declines. Right now it is in the middle of a decline, with the shares off more than 45% from their early 2024 high. If you look at a long-term chart of the company's share price performance, that drop, while severe, isn't particularly remarkable, historically speaking.
