Money and Finance
Nucor (NUE) operates mini-mills in the steel process. I recently ran their numbers through my spreadsheet and I'm fairly intrigued by the possibilities. Especially since I think the global economy is improving and the demand for steel should increase in the coming years leading to higher profits for Nucor.
DCF Valuation:
Analysts foresee NUE growing earnings by 9.55% per year for the next five years and I've assumed they will continue to grow earnings at 2.50% per year after that. Using a discount rate of 10% and taking the future earnings back to present value NUE is fairly valued with the DCF giving a price of $43.54 and NUE's current stock price is $43.57. These calculations are based on the TTM EPS of $2.45. If you start the calculations based off the analysts expectation of $3.12 for this year the DCF becomes $55.44 meaning it's currently undervalued.
Graham Number:
The Graham Number for NUE is $36.03 based off TTM EPS meaning it's overvalued by about 21%. If you use the analysts 2012 EPS estimate you get a Graham Number of $40.66.
Average High Dividend Yield:
The AHDY for NUE over the previous 10 years is 2.78%. It's current yield is 3.35%. In order for it to reach it's AHDY the stock price must increase to $52.58 meaning a 17% upside.
Average Low PE Price:
NUE's ALPE for the previous 10 years is 16.19. By applying that to the analysts $3.12 estimate for 2012 EPS, you get a low price of $50.51. This is about a 14% upside.
Dividend Discount Model:
For the DDM, I've assumed a discount rate of 7.5% and a long-term dividend growth rate of 2.50%. For the next five years I've assumed the lesser of the 1, 3, 5 & 10 year dividend growth rates which is 0.69%. Discounting the future dividends back to today you get a price of $25.07. I think NUE's prospects are better than that and they will be able to increase the dividend more than the 0.69%, so re-running the numbers with a 6% growth rate for the next 5 years you get a price target of $31.63.
PE valuations:
NUE's Trailing PE is 17.78 and their forward PE is 10.68. Their CAPE for the previous 10 years is 16.20. This means on a trailing basis they are slightly overvalued versus CAPE but is undervalued on a foward looking basis.
Fundamentals:
I don't like their gross and profit margins as low as they are but that is more of a factor of the current economy. Both have improved over the last year with the gross margin improving 82% and the profit margin improving 359%. I like seeing that the margins are moving in the right direction and should continue to get better as global steel demand increases. I would like to see a better cash to debt ratio but NUE's is a industry the requires more debt than some. Revenue has increased 26% over the past year.
Dividend Analysis:
I like the current yield being over 3%. The 1 and 5 year growth rates are a little concerning but the 5 and 10 year growth rates make me fairly certain that the recent low growth rates are due to the crazy mess that we have been through in recent years. They're payout ratio is a little high for my liking but I see it going down despite increases in the dividends as a function of earnings rising faster.
The following charts shed a bit of light on the numbers.
As you can tell from the first chart, earnings have been growing much faster than the stock price over the past 2 years. The second chart shows the forecasted prices based off the historical PE's and earning estimates. I included a price line based off a compressed PE that is only 0.75 of the average PE for the last 10 years to give an added margin of safety. If you can get a purchase price close to the forecast based off the projections ($37.89) then you should be able to see a good return on capital and enjoy a nice YOC (3.85%).
Unless the stock market pulls back I'm not sure if you'll ever see that stock price any time soon. The best way to get a lower entry price is probably through cash-secured puts where you can at least earn a solid return while waiting for the price to come back. You can check my previous post on NUE puts to see my thoughts on those possibilities.
Overall I think NUE is fairly valued at this point in time.
*I've added the following on 3/5/12
Since I mentioned that I feel the better way to buy into NUE is to sell puts I figured I should at least give an option. I like the $39 Jul 20 2012 Put for $1.86. This would give you a creation price of $37.14 which would give a good margin of safety (~21%) to the average valuation that I calculated of $46.98. Your YOC would be 3.92% which is a great yield for a solid company like NUE. And if the option just expires you would get a total return of 3.41% over approximately 5 months or a CAGR of 9.42%. Either outcome would be welcomed by me. Unfortunately I can't make this move since I don't have the $3,900 sitting around.
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Money and Finance
Nucor Stock Analysis
Nucor (NUE) operates mini-mills in the steel process. I recently ran their numbers through my spreadsheet and I'm fairly intrigued by the possibilities. Especially since I think the global economy is improving and the demand for steel should increase in the coming years leading to higher profits for Nucor.
DCF Valuation:
Analysts foresee NUE growing earnings by 9.55% per year for the next five years and I've assumed they will continue to grow earnings at 2.50% per year after that. Using a discount rate of 10% and taking the future earnings back to present value NUE is fairly valued with the DCF giving a price of $43.54 and NUE's current stock price is $43.57. These calculations are based on the TTM EPS of $2.45. If you start the calculations based off the analysts expectation of $3.12 for this year the DCF becomes $55.44 meaning it's currently undervalued.
Graham Number:
The Graham Number for NUE is $36.03 based off TTM EPS meaning it's overvalued by about 21%. If you use the analysts 2012 EPS estimate you get a Graham Number of $40.66.
Average High Dividend Yield:
The AHDY for NUE over the previous 10 years is 2.78%. It's current yield is 3.35%. In order for it to reach it's AHDY the stock price must increase to $52.58 meaning a 17% upside.
Average Low PE Price:
NUE's ALPE for the previous 10 years is 16.19. By applying that to the analysts $3.12 estimate for 2012 EPS, you get a low price of $50.51. This is about a 14% upside.
Dividend Discount Model:
For the DDM, I've assumed a discount rate of 7.5% and a long-term dividend growth rate of 2.50%. For the next five years I've assumed the lesser of the 1, 3, 5 & 10 year dividend growth rates which is 0.69%. Discounting the future dividends back to today you get a price of $25.07. I think NUE's prospects are better than that and they will be able to increase the dividend more than the 0.69%, so re-running the numbers with a 6% growth rate for the next 5 years you get a price target of $31.63.
PE valuations:
NUE's Trailing PE is 17.78 and their forward PE is 10.68. Their CAPE for the previous 10 years is 16.20. This means on a trailing basis they are slightly overvalued versus CAPE but is undervalued on a foward looking basis.
Fundamentals:
I don't like their gross and profit margins as low as they are but that is more of a factor of the current economy. Both have improved over the last year with the gross margin improving 82% and the profit margin improving 359%. I like seeing that the margins are moving in the right direction and should continue to get better as global steel demand increases. I would like to see a better cash to debt ratio but NUE's is a industry the requires more debt than some. Revenue has increased 26% over the past year.
Dividend Analysis:
I like the current yield being over 3%. The 1 and 5 year growth rates are a little concerning but the 5 and 10 year growth rates make me fairly certain that the recent low growth rates are due to the crazy mess that we have been through in recent years. They're payout ratio is a little high for my liking but I see it going down despite increases in the dividends as a function of earnings rising faster.
The following charts shed a bit of light on the numbers.
As you can tell from the first chart, earnings have been growing much faster than the stock price over the past 2 years. The second chart shows the forecasted prices based off the historical PE's and earning estimates. I included a price line based off a compressed PE that is only 0.75 of the average PE for the last 10 years to give an added margin of safety. If you can get a purchase price close to the forecast based off the projections ($37.89) then you should be able to see a good return on capital and enjoy a nice YOC (3.85%).
Unless the stock market pulls back I'm not sure if you'll ever see that stock price any time soon. The best way to get a lower entry price is probably through cash-secured puts where you can at least earn a solid return while waiting for the price to come back. You can check my previous post on NUE puts to see my thoughts on those possibilities.
Overall I think NUE is fairly valued at this point in time.
*I've added the following on 3/5/12
Since I mentioned that I feel the better way to buy into NUE is to sell puts I figured I should at least give an option. I like the $39 Jul 20 2012 Put for $1.86. This would give you a creation price of $37.14 which would give a good margin of safety (~21%) to the average valuation that I calculated of $46.98. Your YOC would be 3.92% which is a great yield for a solid company like NUE. And if the option just expires you would get a total return of 3.41% over approximately 5 months or a CAGR of 9.42%. Either outcome would be welcomed by me. Unfortunately I can't make this move since I don't have the $3,900 sitting around.
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