Investment Jungle

Investment Jungle reader Mr. Beantown has graciously provided a list of potential Rule #1 stocks.

Today, we will have a look at the stock at the top of his list - Nucor Corporation which trades on the NYSE under the symbol NUE.

Company Profile:

From Yahoo Finance

Nucor Corporation, through its subsidiaries, engages in the manufacture and sale of steel and steel related products in the United States. It operates in two segments, Steel Mills and Steel Products. The Steel Mills segment offers hot-rolled steel products, such as angles, rounds, flats, channels, rebar, sheets, wide-flange beams, pilings, billets, blooms, beam blanks, and plates; and cold-rolled steel. The Steel Products segment manufactures steel joists and joist girders, steel deck, cold finished steel, steel fasteners, metal building systems, and light gauge steel framing. The company sells its hot-rolled steel and cold-rolled steel to steel service centers, fabricators, and manufacturers; steel joists and joist girders, and steel deck to general contractors and fabricators; and cold finished steel and steel fasteners to distributors and manufacturers.

Market capitalization is $16.83B.

Fundamental Analysis:

Let’s have a look at the Big Five. This is what determines if this stock is a Rule #1 stock or not.

Starting with the return on invested capital, I see that this company runs into trouble. Phil Town says that ROIC should be a minimum of 10% in each of the last 10 years. However, NUE had a total of 4 years that do not meet this minimum. In 1999, 2001, 2002 and 2003, Nucor Corporation has ROIC below the 10% minimum. However, in the last 3 years, the ROIC has been absolutely amazing at over 25% each year.

This shows up in the return on equity as well. There were 3 years which delivered an ROE of below 10%. And the last 3 years have had excellent ROE of 30% or more!

The equity growth rate had been trending in the right direction. The 9 year rate is 11.98%. The 5 year rate increases to 19.81%. The 3 year rate jumps to 28.94%! But last year’s equity growth rate dropped down to 16.24%.

Earnings per share growth rate also doesn’t show the upward trend. Now, in 2004, the EPS growth rate was an astonishing 1920%! Obviously that is going to skew all of our historical numbers. I mean, the 5 year rate comes in at 97.86%! And the 3 year rate doubles that at 188.4%! It would be rather difficult to keep increasing those types of numbers.

Sales growth rates have also dropped off. The 9 year rate is 16.69%. The 5 year rate increases to 32.57%. The 3 year rate slides back to 30.72%. And last year’s rate drops to 16.14%.

Cash flow growth rates have experienced the same trend. The 9 year rate is 18.79%. The 5 year rate skyrockets to 48.63%. The 3 year rate continues higher to 67.01%. And last year’s cash flow growth rate drops back to 30.13%.

Stock Analysis:

Let’s calculate the sticker price.

For my initial future EPS growth rate, I chose the 9 year equity growth rate rate of 11.98%. That is more conservative than the 5 year rate. However, analysts have only forecast 8.40%. So I will use their more conservative estimate.

For my initial future P/E, I chose the current P/E of 10.35. That is significantly lower than the 10 year average of 21.4 or the 5 year average of 23.51.

With this information, the sticker price works out to $31.13. At today’s current price of $56.21, Mr. Market is demanding a premium of 80.58%!

Check my Rule #1 calculations for NUE.

Here is the 1 year stock price chart:

Conclusion:

Is this a Rule #1 stock? The ROIC would argue no. The trends in all of the growth rates would also argue no. This company has had some very explosive growth rates over the last few years. Trying to keep that growth rate moving forward is almost impossible. But the analysts do agree that the explosive growth rate seems to be over.

Full disclosure: I do not own shares in NUE.

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