Nucor Steel Corporation

Nucor Corporation

Introduction

Nucor Corporation, the largest U.S. mini-mill, continues to gain market share in flat roll and strip steel. Recent successful acquisitions, application of new technologies, prospects for global growth, a strong balance sheet, as well as improved economic outlook for the steel industry, make Nucor an attractive buy with a near term stock price target of $65 to $70.

Background

Nucor Corporation (NUE) was founded by auto manufacturer Ranson E. Olds. Through a series of permutations the company evolved into a nuclear instrument and electronics business, known as the Nuclear Corporation of America before regaining its focus in the steel business and changing its name to Nucor Corporation in 1972. In every year and every quarter since its incorporation, Nucor has been profitable. Steel production has grown from 5.7 million tons in 1993 to 19.7 million tons by 2004. Sales have grown from $2.3 billion in 1993 to $11.4 billion by 2004.

Nucor's culture focuses on a low cost structure. The company is non-union in contrast to the large integrated steel companies. Therefore, it doesn't have any legacy costs. The pay system is incentive-based, and it maintains employee morale using a no lay-off practice. Nucor has a decentralized, flat management structure.

Nucor produces steel by melting recycled scrap in electric arc furnaces to make carbon steel products in its mini-mills. Nucor currently has 47 operating facilities in 15 states. The company is the largest recycler in the United States, recycling 17 million tons of scrap steel in 2004.

Nucor's products include both hot-rolled steel products such as angles, rounds, flats, channels, sheet, wide-flange beams, pilings, billets, blooms, beam blanks, and plate steel. The company's other products include steel joists, girders, steel deck, cold finished steel, steel fasteners, metal building systems, and light gauge steel framing. The hot-rolled and cold-rolled steel products are sold to steel service centers, fabricators, and manufacturers. It sells steel joists, girders, and steel deck to general contractors and fabricators. The cold finished steel and steel fasteners are sold to both distributors and manufacturers.

Nucor is currently the largest structural steel, steel bar, steel joist and cold finish bar producer in the United States.

Nucor continues to exhibit financial strength. Its debt at the end of 2004 was approximately 20% of total capital. The debt was rated A+ by Standard and Poor. Operating cash flow exceeded $1 billion during 2004. Nucor has increased its cash dividend every year since 1973, including twice in 2004 and once in the first quarter of 2005. During the second quarter of this year, NUE reactivated its share buy-back program and recently repurchased 4 million shares at a cost of $205.8 million. 2004 was a banner year for NUE, with record EPS of $7.04 and steel shipments of 19,500,000 tons.

Fundamentals

U.S. Steel Industry

Current trends indicate that U.S. spot steel prices have bottomed out. The latest prices for hot rolled steel were estimated to be between $390-420/ton with estimates for fourth quarter prices to be in the $430/ton range. It has been recently reported that AK Steel successfully added surcharges to September orders, effectively increasing the hot-rolled steel price.

U.S. steel fundamentals have also improved as the industry has consolidated. Customer inventories also seem to have been drawn down and backlogs have been picking up. The demand increase will likely put upward pressure on prices.

Nucor's Success in Pursuing its Growth Strategy

Nucor's growth strategy has focused on five main areas, optimizing existing operations, acquisitions, growth through Greenfield projects/new technologies, and global joint ventures. Nucor has sought to optimize existing operations by using continuing quality improvements and cost reductions. The company has also made a series of capital investments that will enable it to provide higher grades of sheet steel for the automotive and appliance markets. Recently NUE has also completed projects that allow it to produce a combined additional 1,000,000 tons of steel product annually. This represents a fraction of the $200,000,000 spent in 2004 to upgrade its production facilities. New U.S. production facilities have also been completed. These include a steel plate mill in North Carolina and a deck plant in upstate New York as well a Castrip technology production facility in Indiana. Current efforts are underway to build another Castrip plant in the U.S. as well as another overseas.

NUE has pursued successful acquisitions. In March 2001 Nucor Steel purchased Auburn Steel Company and acquired a 470,000 tons-per-year merchant bar, rebar and special bar quality steel mill. This mill was a good strategic fit with Nucor's joist and deck plant nearby. With Nucor management in place, the Auburn Steel Mill set a 26-year production record with continued growth from 2001 through 2004. In July 2002, Nucor purchased the former Trico Steel Company. This acquisition increased its flat rolled steel production and is building market share in this segment. The initial production