Last night, Nucor (NUE) told us what the charts and smaller steel companies have been telling us for months. The company guided to the low end of the $1.95 to $2.15 range. Nucor added that weakened demand, primarily for sheet steel, accompanied by significant decreases in scrap prices caused part of the shortfall.
The one thing that is informative about NUE’s "surprise" announcement, as opposed to another steel company telling us, is that NUE is the best run in the group and you can believe the management when they say demand weakened. This would sound more like an excuse rather than a fact, coming from any other company in the group. I would assume the majority of the weakness stems from auto manufacturing but I don’t know enough about the steel end markets to make that pronouncement.
It seems that 2005 will mark the peak of the earnings cycle for NUE and the rest of the steel stocks. Currently, the low yearly estimate for NUE is $6.25 and the high is $8.75. In 2000, the last time NUE reached peak earnings of $5.02, the stock traded between 8 – 10x earnings. So it looks like the market has already discounted this disappointment to a large extent. Based on the peak earnings multiple achieved in 2000 and the low yearly estimate of $6.25, NUE should be trading at around $50.00 – $62.50. Let’s assume that the earnings get cut a bit more and NUE earns $6.00 this year – that gives a downside target of about $48.00.
Based on the chart NUE will probably trade down to the low $40s. But based on the fundamental earnings estimates, if they are close, that would probably be a good area to bet on a bounce back to the upper $40s.
So if steel is weak and the economy is weaker, the real question becomes, what the heck is going on with Copper?!?!
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