Why we should sell Nucor Corporation (NYSE:NUE) for $ 44 ?

Nucor Corporation (NYSE:NUE) 

Nucor Corporation (Nucor) manufactures steel and steel products. The Company also produces direct reduced iron (DRI) for use in the Company's steel mills. It also processes ferrous and nonferrous metals and brokers ferrous and nonferrous metals, pig iron, hot briquetted iron (HBI) and DRI. Nucor operates in three segments: steel mills, steel products and raw materials. In the steel mills segment, Nucor produces and distributes sheet steel, plate steel, structural steel and bar steel. In the steel products segment, Nucor produces steel joists and joist girders, steel deck, fabricated concrete reinforcing steel, cold finished steel, steel fasteners, metal building systems, steel grating and expanded metal, and wire and wire mesh. In the raw materials segment, the Company produces DRI; brokers ferrous and nonferrous metals, pig iron, HBI and DRI; supplies Ferro-alloys, and processes ferrous and nonferrous scrap metal. 

• Nucor's financial performance has taken a hit due to a drop in average selling prices as steel imports in the U.S. have increased and energy prices have declined. 
• Chinese steel production and exports have slowed down of late, but an increase in output is possible as the country moves toward urbanization, and this could trigger overproduction. 
• China's steel output could rise to 1 billion tons by 2020, up from 822 million tons in 2014, creating the possibility of an acceleration in imports if growth slows down. 
• A crude oil price recovery is uncertain due to rising production, and this will keep Nucor's flat-rolled and OCTG segment under pressure. 

When Nucor (NYSE:NUE) released its first-quarter results at the end of last month, they clearly reflected the negative impact of the influx of steel imports into the country. There was a significant drop in both its revenue and profit, as Nucor's average selling price declined by 5% during the quarter. The steelmaker also suffered on account of a decline in oil prices, which led to lower demand from the energy sector and hurt Nucor's flat-rolled division. 

As a result of the various headwinds that Nucor is facing, its revenue for the quarter declined 14% to $4.4 billion from last year, while earnings tanked to 21 cents a share as compared to 35 cents per share last year. Now, looking ahead, I believe that Nucor's performance will weaken further as the conditions in the U.S. steel industry could worsen. 

The U.S. steel industry has suffered due to a massive increase in steel production in China. Now, as economic growth in China has slowed down, so has manufacturing activity, creating a steel oversupply. This has led Chinese steel companies to export their steel at lower prices to the U.S., which is ultimately hurting the prospects of steelmakers such as Nucor. 

As reported by the Sydney Morning Herald: 

"Development of China's vast western regions could drive up steel production to 1 billion tons a year by 2020, according to exchange-traded fund provider Beta Shares. That would amount to a 21 per cent increase on the 822 million tons China produced in 2014. 

Beta Shares​chief economist David Bassanese said China's hunger would increase if it built up infrastructure, property and heavy industry in the country's west, where 70 per cent of the population live. He said that could be achieved even assuming a pessimistic economic growth figure of 5.5 per cent, as the country focuses more on sustainable growth." Thus, there is a likelihood that steel output in China could rise once again going forward. 

On the other hand, crude oil prices might not recover going forward, and this will be another headwind for Nucor. Last quarter, Nucor suffered due to the drop in energy prices, as this led energy companies to cut their capital expenditure and infrastructure build-outs. Moreover, the oil country tubular goods (OCTG) segment suffered due to high imports, leading to oversupply in the pipe and tube segment. 

Now, this situation could worsen going forward as OPEC continues to increase production. For example, in April, OPEC's crude production increased 18,000 barrels per day, clocking 30.84 million bpd. Additionally, even though the oil and gas rig count in the U.S. has declined of late, there is a possibility that production could increase once again as oil companies are prepared to increase production if the recent rally continues. 

Any further drop in crude prices would lead to another round of capex cuts, and this will once again create an oversupply situation in the flat-rolled and OCTG segments for Nucor. 

Conclusion: 

Nucor has lost close to 9% of its market capitalization in the last six months, and this trend could continue as the arguments presented above indicate. 

Vtrade is expecting Nucor Corporation around USD 44 by third quarter.