nue hold nucor inc trivedi fall07

7/30/2019 NUE Hold Nucor Inc Trivedi Fall07

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Nucor Inc.Namrata Trivedi Fall 2007

Company Overview

Incorporated in Delaware in 1958, Nucor Corp. is not only one of thelargest domestic steelmakers and the nations biggest mini-milloperator, but also the largest recycler that uses scrap steel as theprimary raw material in producing steel products. As of FY 2006, thecompany recycled over 21 million tons of scrap steel1.

Nucor has a simple, highly decentralized organizational structure,which allows room for quick decisions and innovations. For the mostpart, day-to-day operating decisions are made by the division generalmanagers and their staff. The management evaluates the operatingperformance of each of its segments based upon division contribution

and ties the performance rewards to the productivity and efficiency.The company, currently, has 11,900 employees out of which only 70employees are executive officers. The key hiring strategy is to employun-unionized labor, which ultimately benefits the company in terms ofvery little legacy costs (healthcare and pension liabilities).

Products & Markets

The revenue comes from two main segments: steel mills and steelproducts. The principal steel mills products are hot-rolled and cold-

rolled steel whereas, the principal steel products are steel joists andjoist girders, steel deck, cold finished steel, steel fasteners, metalbuilding systems and light gauge steel framing. In both, the steel milland steel products, segments, products are manufactured based oncustomer orders, and therefore customer backlog is a good indicator ofcompanys future revenue growth. The company markets theseproducts mainly through in-house sales forces. Most of these productsare commodity items and therefore Nucor competes on price point andservice. The primary factors affecting the demand for steel productsare overall growth of the economy and growth in demand for durablegoods (such as autos and construction).

In 2006, these two markets accounted for 29.1% of shipments in theU.S. market. Other markets include appliances, containers, machinery,and oil and gas, known as service centers, accounted for 21.8% ofindustry shipments in the U.S. market.2 In the FY 2006, nearly 88% ofthe net revenue came from the Steel Mills segment while

1Nucor Corp. , SEC filings, 10-K 12/31/2006

2Nucor Corp, S&P company report


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approximately 12% of the revenue came from the Steel Productssegment. Overall, during the last five years, Nucors sales have grownover 240% from $4.33 billion in 2001 to $14.75 billion in 2006. Thisgrowth has come mainly through acquisition and optimization ofexisting operations.

A major portion of the steel sales (approx. 75% in FY 2006) are madeto contract customers, which permits price adjustments to reflectchanges in prevailing raw material costs for a short period (six totwelve months). Thus, a backlog of orders is critical against fluctuatingraw material prices. As of December, 2006, in the steel mills segment,Nucors backlog of orders was approximately $2.52 billion, and in thesteel products segment, it was about $572.4 million.

Business Strategy

Nucor operates in a relatively fragmented and mature market. Theirproductivity and cost efficiency through optimized operations helpmitigate the pricing pressure. Historically, the company operated onthe basis of green-field growth and optimization of existing operations.Although the company still partly relies on green-field projects, duringrecent years, this strategy has been shifted toward obtainingprofitability and growth through acquisitions and through jointventures that leverage new technologies. Nucors strategy is toacquire a source of raw material or integrate some new technologyinto their operations. The goal is to expand in higher value-addedsheet markets. In sum, Nucors strategy to become competitive

includes introduction of new steelmaking technology and seek growththrough acquisitions and joint ventures to source one-third of its rawmaterial requirements.3 The company is leaning toward acquiring newbusiness that increases production capacity, participation indownstream steel projects, and provides resources of raw materials.The objective is to securitize against rising costs of raw materials,reduce reliance on imports, and better manage costs.

Growth

3 Nucor Inc. SEC Filling, 10-K , FY 2006


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challenges in maintaining the same level of cost efficiency. Heavyimports of semi-finished steel from China have ruined the growth ofthe U.S. steel industry and its workers over the past few years. In thegiven industry scenario, Nucors recent strategy to procure about onethird of its metal feedstock may certainly impose a burden on fixed

costs and reduce profitability. However, impact of declining U.S. dollarand global oversupply may wipe off these cost savings.

Company Management

Nucors management team seems stable and strong. Many key levelexecutives have served and successful led the company for a fairlylong time. The company director Mr. Daniel R. DiMicco has been withNucor since 1992. Chief Financial Officer, Treasurer and ExecutiveVice President, Terry S. Lisenby, has been with Nucor since 1985.

Nucors Executive Vice President, Mr. John J. Ferriola, has been with thecompany since 1992. It sum, the management team has successfullylead the company over a long period of time.

Summary Recommendation: Sell Some Praxair

Currently, in the PSFA portfolio, we have 20 shares of Nucor Corp.purchased on 06/06/2001 at $54.04 per share and in the DA-Davidsonportfolio, and we have 60 shares of Nucor Corp. purchased on12/31/2005 at $69.16 per share.

The DCF valuation indicates the stock is over valued by 13%.Considering the slowdown in housing, auto, and construction markets,global over capacity and imports from China, Nucors performance islikely to decline over the next few years. Moreover, Nucor is adomestic player. The company operations are limited to the U.S. andCanada markets. Until the U.S. housing and auto markets show anyimprovement (which is likely to take at least two-three years), anddemand for steel and steel products stabilizes, Nucors performancewill not improve. Therefore, I recommend that we reduce our holdingsin Nucor and use the sales proceeds to increase our holdings in Praxair.

Selling about 45 shares of Nucor should be sufficient to bring us in-linewith my recommendation.


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Nucor Inc. - Financials


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N U C O R C O R P$ M I L L I O N S , E X C E P T P E R SH A R E % C h an g e C o m m o n S i z e

A N N U A L I N C O M E S T A T E M E N TF Y 20 02F Y 2 003F Y 2 00 4F Y 2 00 5F Y 2 00 6 F Y 2 00 2F Y 2003F Y 2004F Y

Sales 3 0% 82% 12 % 1 6% 10 0% 1 00 % 1 00 % 1 0C o s t o f G o o d s S o ld 4 0% 55% 11 % 1 2% 8 4% 90 % 77 % 7 6

G r o ss P r o f i t - 1 8% 31 8% 13 % 2 8% 1 6% 10 % 23 % 2 4

S e ll i n g , G en e ra l, &

A d m in is trat iv e E x p en se - 6% 15 1% 19 % 2 0% 4% 3 % 4% 4

O p erat in g I n co m e B ef o re D ep rec. - 2 2% 37 6% 12 % 3 0% 1 3% 7 % 20 % 2 0

D ep reciat io n , D ep let io n , & A m o rt iz at io n 1 9% 5% -2 % - 3% 6% 6 % 3% 3

O p er ati n g P r o f it ( E B I T ) - 6 5% 167 7% 15 % 3 6% 6% 2 % 16 % 1 7

I n t eres t E x p en s e 1 8% 8% 25 % 1 0% 0% 0 % 0% 0

N o n - O p erat in g I n co m e/ E x p en se - 7 1% 17 7% 364% 140 % 0% 0 % 0% 0

S p ecial I tem s - 6 2% - 20 0% - 1 79% - 100% 1% 0 % 0% 0

P retax I n co m e - 7 1% 189 5% 17 % 3 7% 6% 1 % 16 % 1 7

T o t al I n co m e T ax es - 9 4% 1 478 7% 16 % 3 3% 1% 0 % 5% 6

M in o r i ty I n terest - 7 0% 23 8% 37 % 9 8% 2% 0 % 1% 1

T ax R at e f ro m I n co m e S tm t - 7 9% 64 6% -1 % - 3% 0% 0 % 0% 0

I n co m e B e fo r e E x tr ao r d i n ar y I t em s& D i sco n t in u ed O p e rat io n s - 6 1% 168 6% 17 % 3 4% 3% 1 % 10 % 1 0

P r ef er red D i v id en d s

N et I n co m e A v ai lab le f o r C o m m o n - 6 1% 168 6% 17 % 3 4% 3% 1 % 10 % 1 0

A d ju sted N et I n co m e A v ai lab le f o r C o m m o n - 6 1% 168 6% 17 % 3 4% 3% 1 % 10 % 1 0

E x t rao rd in ary I tem s 0% 0 % 0% 0

D i sco n t in u ed O p e rat io n s

A d ju sted N et I n co m e - 6 1% 168 6% 17 % 3 4% 3% 1 % 10 % 1 0

E P S B as ic f ro m O p e rat io n s

E P S D i lu t ed f ro m O p erat io n s

D i v id e n d s P e r S h a re

C o m S h ar es f o r B a si c E P S

C o m S h ares fo r D i l u ted E P S


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Long-Term D

Long-Term D

Current Debt

Financing Act

Financing Act

Exchange Rat

Cash and EquDIRECT OP

Interest Paid -

Income Taxes

FCFE Assum

Effective Tax

Income Tax fr

Changes in de

Cash Taxes P

Pre-tax Incom

Effective Tax

Change in wo

Total Current

Total Current

Change i

Total Current

Accounts Pa

Accounts Pay


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NUCOR CORPANN UAL STATEME NT OF CASH FLOWS FY 2002 FY 2003 FY 2004 FY 2005

INDIRECT OPERATIN G ACTIVITIES

I ncome Before E xtraordinary I tems 162 63 1121 1310Depreciation and Amortization 307 364 383 375

E xtraordinary I tems and D isc. Operations 0 0 0 0

Deferred Taxes 31 74 7 -29

E quity in N et Loss (E arnings) 0 0 0 0

Sale of Property, Plant, and E quipment

and Sale of I nvestments - Loss (Gain) 0 -4 -2 0

Funds from Operations - Other 79 24 94 123

Receivables - Decrease (I ncrease) -100 -89 -355 -19

I nventory - Decrease (I ncrease) -58 29 -636 338

Accounts Payable and Accrued Liabs - I nc (Dec) 36 55 359 64I ncome Taxes - Accrued - I ncrease (Decrease) 0 0 35 -68

Other Assets and Liabilities - N et Change 40 -21 22 44

Operating Activities - N et Cash Flow 497 495 1030 2137

INVE STIN G ACTIVITIES

I nvestments - I ncrease 6 22 82 42

Sale of I nvestments 0 0 0 0

Short-Term I nvestments - Change 0 0 0 -857

Capital Expenditures 244 215 286 331

Sale of Property, Plant, and E quipment 0 12 3 1

Acquisitions 653 35 170 155

I nvesting Activities - Other 0 -7 0 0

I nvesting Activities - N et Cash Flow -901 -268 -535 -1385

FINANCING ACTIVITIES

Sale of Common and Preferred Stock 19 19 69 40

Purchase of Common and Preferred Stock 0 0 0 291

Cash D ividends 59 63 75 210

Long-Term Debt - I ssuance 350 25 20 0

Long-Term Debt - Reduction 2 16 0 0

Current Debt - Changes 0 0 0 0Financing Activities - Other -147 -61 -80 -90

Financing Activities - N et Cash Flow 161 -96 -66 -551

E xchange Rate E ffect 0 0 0 0

Cash and E quivalents - Change -243 131 429 201

DIRECT OPERATIN G ACTIVITIES

I nterest Paid - N et 20 33 32 37

I ncome Taxes Paid 32 -55 550 807


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N U CO R C O R PFor Forecasting A ssumptions

$ M I L L I O N S, E X C E P T PE R SH A R E Selected H istorical F inancials As % o

AN N U AL IN C O M E ST A T E M E N T FY 2002 FY 2003 FY 2004 FY 2005 FSales 100% 100% 100% 100%

Cost of G oods So ld 84% 90% 77% 76%

Gross Profit 16% 10% 23% 24%

Sellin g, G eneral, &

A dm inistrative E xpense 4% 3% 4% 4%

O perating I ncom e B efore D eprec. 13% 7% 20% 20%

D epreciation, D epletion, & A m ortization 6% 6% 3% 3%

O perating Profit (E B IT ) 6% 2% 16% 17%

I nterest E xpense 0% 0% 0% 0%

N on-O perating I ncom e/ E xpense 0% 0% 0% 0%

Special I tem s 1% 0% 0% 0%

Pretax I ncom e 6% 1% 16% 17%

T otal I ncom e T axes 1% 0% 5% 6%

M inority I nterest 2% 0% 1% 1%

T ax Rate from I ncom e Stm t 0% 0% 0% 0%

I ncom e Befo re E xtraordinary I tem s

& D iscon tinued O perations 3% 1% 10% 10%

Preferred D ividends 0% 0% 0% 0%

N et I ncom e A vailable for Com m on 3% 1% 10% 10%

A djusted N et I ncom e A vailable for Com m on 3% 1% 10% 10%

E xtraordinary I tem s 0% 0% 0% 0%

D iscontinued O perations 0% 0% 0% 0%


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N U C O R CO R PF CF E A ssum ptio ns and O ther C alculatio ns F Y 2002 F Y 2003 F Y 2004 F Y 2005 F Y 2006 F

E ffective T ax R ate C alculation:

I ncom e T ax from I ncom e Stm t 68 4 610 706 936

Changes in deferred incom e taxes from B alance Sheet 258 52 -15 -46C ash T axes Paid 68 -254 558 721 982

Pre-tax I ncom e from I ncom e Statem ent 310 91 1812 2127 2913

E ffective T ax Rate 22% -279% 31% 34% 34%

C hange in working capital C alculation:

T otal C urrent A ssets 1424 1621 3175 4072 4675

T otal C urrent A ssets as a % of R evenue 30% 26% 28% 32% 32%

Change in Current A ssets 196 1554 897 603

T otal C urrent L iabi lit iesA ccounts Payable 247 330 472 502 517

A ccounts Payable as a % of Revenue 5% 5% 4% 4% 4%

O ther Current L iabilities 319 300 565 753 933

O ther Current L iabilities as a % of Revenue 7% 5% 5% 6% 6%

T otal C urrent L iabi lit ies 567 630 1037 1254 1450

Change in Current L iabilities 63 407 218 196

C hange in Working C apital 133 1147 679 408

Change in W orking Capital as a % of Revenue 2% 10% 5% 3%

Gross C apital E xpenditure Calculation:N et P& E 2932 2817 2818 2856 2856

N et P& E as % of Revenue 61% 45% 25% 22% 19%

Change in N et P& E -115 1 37 1

A dd D epreciation 364 383 375 364

D epreciation as % of Revevnue 6% 3% 3% 2%

T otal G ross Capital E xpenditu re 249 384 412 365

Capital E xpenditure as a % o f R evenue 5% 3% 3% 3% 2%

Capital E xpenditure as a % o f C F from O perations 49% 44% 28% 16% 15%

N et increase in debt, minority int & other liabilities calculation:

Change in L ong-term D ebt 25 20 -1 0

Change in M inority I nterest -39 -4 21 44

Change in O ther non-current liabilities -189 23 -12 7

T otal C hange in L ong-T erm L iabi lities -204 39 7 51

Chan e in L on -T erm L iabilities as a % o f Revenue -3% 0.34% 0.06% 0.35%


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N U C O R C O R P$ M I L L I O N S, E X C E P T P E R S H A R E

G r o w th R a te

A s s u m p t i o n - 1 0 . 0 0 %6 .0 0 %7 .0 0 %8 .00 %8 .0 0 %8 .0 0 %6 .50 %5 .0

A N N U A L I N C O M E S T A T E M E N T

F o r e c a st A ss

A s a % o f R e F Y 2007F Y 2008F Y 2009F Y 2 010F Y 2 011F Y 2012F Y 20 13F Y 2 014F Y

S ales 1 6 ,3 5 61 4 ,7 2 01 5 ,6 0 41 6 ,6 9 61 8 ,0 3 21 9 ,4 7 42 1 ,0 3 22 2 ,3 9 92 3

C o s t o f G o o d s S o l d 7 4 % 12 ,62 510 ,8 9611 ,55 012 ,3 5913 ,3 4714 ,41 515 ,56 816 ,5 8017

G r o ss P r o fi t 3,731 3,824 4,054 4,337 4,684 5,059 5,464 5,819 6

S el li n g , G en e ral , & A d m i n i s tr at iv e E x p en s e 4 % 5 9 7 5 9 1 6 2 7 6 7 1 7 2 4 7 8 2 8 4 5 9 0 0 9

O p e rat in g I n co m e B ef o r e D ep r ec. 3,133 3 ,2 3 3 3 , 4 2 7 3 ,6 6 7 3 ,9 6 0 4 ,2 7 7 4 ,6 1 9 4 ,9 1 9 5

D ep r eci at io n , D ep l et io n , & A m o r ti z at io n 2 % 4 0 1 3 6 3 3 8 5 4 1 2 4 4 5 4 8 0 5 1 9 5 5 3 5

O p er ati n g P ro fi t (E B I T ) 2,731 2 ,870 3,042 3,255 3,515 3,796 4 ,100 4 ,367 4,

I n t eres t E x p e n s e 0 .3% 3 8 4 0 4 3 4 6 4 9 5 3 5 8 6 1

N o n - O p erat in g I n co m e/ E x p en s e 0 .5% 5 3 7 8 8 2 8 8 9 5 1 0 3 1 1 1 1 1 8 1S p e ci al I t em s 0 0 0 0 0 0 0 0 0

P ret ax I n co m e 2,699 2 ,7 5 2 2 , 9 1 7 3 ,1 2 1 3 ,3 7 1 3 ,6 4 0 3 ,9 3 2 4 ,1 8 7 4

T o tal I n co m e T ax es 6 .3 5 % 8 6 4 9 3 4 9 9 0 1 ,0 6 0 1 ,1 4 4 1 ,2 3 6 1 ,3 3 5 1 ,4 2 1 1 ,

M i n o r it y I n t er es t 1 .4 9 % 2 7 7 2 1 9 2 3 2 2 4 8 2 6 8 2 8 9 3 1 3 3 3 3 3

T ax R at e f ro m I n co m e S tm t 3 2 % 3 4 % 3 4 % 3 4 % 3 4 % 3 4 % 3 4 % 3 4 % 3

I n co m e B ef o r e E x tr ao rd i n a ry I t em s & D is co n t i n u ed O p e rat io n s1,559 1 ,5 9 9 1 , 6 9 5 1 ,8 1 3 1 ,9 5 9 2 ,1 1 5 2 ,2 8 4 2 ,4 3 3 2

P ref erred D iv id en d s 0 0 0 0 0 0 0 0

N et I n co m e A v ai lab l e f o r C o m m o n 1,559 1 ,5 9 9 1 , 6 9 5 1 ,8 1 3 1 ,9 5 9 2 ,1 1 5 2 ,2 8 4 2 ,4 3 3 2

A d j u s ted N et I n co m e A v ai lab l e f o r C o m m o n 1 ,5 5 9 1 ,5 9 9 1 ,6 95 1 ,8 13 1 ,9 59 2 ,1 1 5 2 ,2 84 2 ,4 33 2 ,

E x t rao rd in ary I tem s 0 0 0 0 0 0 0 0

D is co n t in u ed O p erat io n s 0 0 0 0 0 0 0 0


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N U C O R C O R P$ M I L L I O N S, E X C E P T P E R SH A R EW A C C

E qu ity B eta

R isk F ree R ate (10 Y r T reasu ry B o n d Y ield ) 4.2

M ark et R isk P rem iu m 4

Sto ck P rice (29 O ct. 2007) $ P er Sh are 63$

Sh ares O u tstan d in g (in M il l io n s) 2

M ark et V alu e o f E qu ity 18,73$T o tal D eb t 922$

I n terest rate o f lo n g- term d eb t. (C o st o f D eb t.) 4.6

T ax R ate 3

D eb t/ T o tal C ap ital 0$

E qu ity/ T o tal C ap ital 0$

T erm in al G ro w th R ate 4C o st o f E qu ity 13.

C o st o f D eb t (A f ter tax ) 3.

W A C C 13.

D ate o f F irst C ash F lo w F o recast 12/ 31

D ate o f V alu atio n 10/ 29

D ays u n t il f i rs t cash f lo w


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NUCOR CORP$ MILLION S, EXCEPT PER SH ARE

FCFF FCFE

Cost of Capital 13.11% 13.

Cash Flow in 2016 1674 1

Terminal Value at 2016 19106 18

Present Value of Terminal value 6171 5

Present V alue of I ntermediate Cash Flow 7,944 7,

Total 14115 13Add Cash 2196 2

Subtract Debt 922

E quity Value 15389 15

Shares Outstanding 295

Value Per Share 52.17 5

Current Price (as on Dec. 5th, 2007) 59.80 5

Discount to Fair value -13% -

nue hold nucor inc trivedi fall07

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