Is Nucor (NUE) a Better Steel Buy Than Commercial Metals Company (CMC)?

Steel production and consumption serve as pivotal indicators for economic expansion. Last year's macroeconomic challenges, now transformed into growth opportunities, have enabled the sector to embrace emerging technologies and capitalize on the momentum of swift urbanization, positioning it for substantial future expansion.

Given this context, I evaluated two Steel stocks, Nucor Corporation (NUE) and Commercial Metals Company (CMC), to determine which could be a better buy for investors. Prior to examining the highlighted stocks, let's first delve into the dynamics of the Steel industry.

Elevated inflation, escalating interest rates, the Russia-Ukraine conflict, and China's lockdowns hindered last year's rebound from the pandemic's effects. As a consequence, industries dependent on steel experienced diminished activity, leading to a demand contraction more severe than expected.

Nevertheless, steel holds broad utility across a spectrum of sectors, encompassing construction, automotive, manufacturing, and electrical appliances. The burgeoning demands of industrialization and urbanization are poised to propel the need for steel, potentially counterbalancing the detrimental impact of macroeconomic challenges.

The Bipartisan Infrastructure Law is set to substantially impact steel demand. The legislation has kickstarted over 3,700 bridge repair and replacement projects across the nation, initiating the restoration of more than 69,000 miles of roadways. Consequently, there is an escalating demand for steel products utilized in road and bridge construction.

Apart from practical applications, advancements in rolling and casting methodologies are expected to fortify industry growth. Also, the sector is anticipated to receive a surge in demand for flat product variations, particularly from automakers, further stimulating its expansion.

The World Steel Association anticipates a 2.3% resurgence in steel demand in the current year, reaching a total of 1,822.3 million metric tons. Projections further indicate a 1.7% expansion in 2024, reaching 1,854.0 million metric tons, propelled by the recovery of the manufacturing sector. 

Meanwhile, according to ReportLinker, the steel manufacturing market is expected to surge by $369.6 billion by 2027, at a CAGR of 4%. As a result, both NUE and CMC are expected to benefit from the industry’s tailwinds.

NUE has marginally gained over the past month compared to CMC’s 1.3% decline. NUE has jumped 17.5% over the past three months, compared to CMC’s 19.1% rise during the same period.

Moreover, NUE has surged 27.9% year-to-date to close the last trading session at $168.60, while CMC has surged by 14.3% during the same time frame to close the last trading session at $55.21.

But which Steel stock could be a better pick? Let’s find out.

Recent Developments

On August 7, NUE unveiled an active Power Purchase Agreement (PPA) with Sebree Solar, LLC, a NextEra Energy Resources, LLC subsidiary, securing 250 megawatts of renewable energy. The innovative Sebree Solar project in Henderson County, Kentucky, is poised to generate up to 400 megawatts of domestically sourced energy.

NUE's substantial growth in Kentucky, driven by substantial investments and job creation, positions the company advantageously. This expansion aligns with the state's emergence as a national leader in forward-looking industries, ensuring a robust market for NUE's steel products, particularly in electric vehicles and advanced metals manufacturing.

On July 13, CMC announced acquiring EDSCO Fasteners LLC, a prominent player in anchoring solutions for the electrical transmission sector, previously owned by MiddleGround Capital. This move could solidify CMC's dominance in construction reinforcement and expand its capacity in emerging and expanding markets.

Recent Financial Results

For the second quarter that ended June 30, 2023, NUE registered net sales of $9.52 billion, a 9% increase over first-quarter net sales. As of July 1, 2023, the company’s cash and cash equivalents came in at $4.51 billion, compared to $4.28 billion as of December 31, 2022. Also, its total current assets amounted to $15.29 billion, compared to $14.69 billion as of December 31, 2022.

For the third quarter that ended May 31, 2023, CMC’s net sales decreased 6.8% year-over-year to $2.34 billion. Its core EBITDA declined 19.1% from the year-ago value to $391.72 million. Also, its adjusted earnings and adjusted EPS decreased 25.1% and 22.6% from the prior year’s period to $239.73 million and $2.02, respectively.

Past And Expected Financial Performance

Over the past three years, NUE’s revenue and EBITDA increased at CAGRs of 22.2% and 59.9%, respectively. Moreover, its net income and EPS rose at respective CAGRs of 121.3% and 134.9% during the same time period.

Analysts expect NUE’s revenue to decrease 15.6% year-over-year to $35.03 billion for the fiscal year ending December 2023. The company’s EPS for the current year is expected to decline 35.7% from the prior year to $18.52. However, for the fiscal first quarter of 2024, NUE’s revenue is estimated to reach $8.79 billion, reflecting a marginal year-over-year increase.

Over the past three years, CMC’s revenue and EBITDA grew at a CAGR of 17.1% and 32.6%, respectively. Moreover, its net income and EPS grew at respective CAGRs of 47.9% and 48.3% during the same time frame.

The consensus revenue estimate of $8.79 billion for the fiscal year ended August 2023 reflects a decline of 1.4% year-over-year. Moreover, the consensus EPS estimate of $7.80 for the same period indicates a 4.8% decline from the prior year.

Valuation

In terms of forward P/E, NUE is currently trading at 9.06x, 26.4% higher than CMC, which is trading at 7.17x. Moreover, NUE’s forward EV/EBITDA multiple of 5.90 is 19.2% higher than CMC’s 4.95x. Additionally, NUE’s forward EV/Sales multiple of 1.27 compares with CMC’s 0.83x.

Profitability

NUE’s trailing-12-month revenue is 4.2 times that of what CMC generates. Moreover, NUE is more profitable, with a trailing-12-month gross profit margin of 25.27%, compared to CMC’s 21.06%.

Additionally, NUE’s trailing-12-month EBITDA margin and net income margin are 23.58% and 14.81%, respectively, compared to CMC’s EBITDA margin of 16.61% and net income margin of 10.72%.

POWR Ratings

NUE has an overall rating of B, which equates to Buy in our proprietary POWR Ratings system. Conversely, CMC has an overall rating of C, translating to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. NUE has an A grade for Quality, justified by its higher-than-industry profitability. NUE’s trailing-12-month EBITDA margin and net income margin of 23.58% and 14.81% is 36.4% and 124.5% higher than the industry average of 17.29% and 6.60%, respectively.

On the other hand, CMC has a B grade for Quality, justified by its probability metrics. The stock’s trailing-12-month EBITDA margin of 16.61% is 4% lower than the 17.29% industry average, while its trailing-12-month net income margin of 10.72% is 62.5% higher than the industry average of 6.60%.

NUE and CMC have a C grade for Stability, justified by their respective 24-month betas of 1.42 and 1.06.

Of the 32 stocks in the A-rated Steel industry, NUE is ranked #15, while CMC is ranked #18. 

Beyond what we’ve stated above, we have also rated both stocks for Growth, Value, Momentum, and Sentiment. Click here to view NUE’s ratings. Get all CMC ratings here.

The Winner

The Steel industry is thriving owing to its diverse applications in construction, automotive, and manufacturing, alongside infrastructure projects. Technological advancements in production methods and increased demand for flat products from the automotive sector are further contributing to the industry's growth.

In addition, favorable government initiatives are expected to further bolster the industry's growth. Notably, prominent Steel stocks NUE and CMC are well-positioned to capitalize on these promising industry prospects.

However, considering CMC’s comparatively lower profitability, its competitor, NUE, seems to be a better buy now.

Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy or Buy. View all the top-rated stocks in the Steel industry here. 

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NUE shares were trading at $169.04 per share on Thursday afternoon, up $0.44 (+0.26%). Year-to-date, NUE has gained 29.09%, versus a 17.22% rise in the benchmark S&P 500 index during the same period.

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.

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