Despite the macroeconomic headwinds and lingering recession fears, demand for basic materials is expected to remain high thanks to rising manufacturing and construction activities and the infrastructure bill. While basic material stock Cleveland-Cliffs (CLF) is not well-positioned to capitalize on the industry tailwinds, one could invest in quality players Nucor Corp. (NUE), Steel Dynamics (STLD), and Friedman Industries (FRD). Continue reading….
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Macroeconomic and geopolitical concerns have weighed on investors’ sentiment, leading to a broad market sell-off since the beginning of the year. To combat the elevated inflation, the Federal Reserve is set to hike the benchmark federal funds rates “significantly‘ this month.
As the equity markets tend to have a bearish response to interest rate hikes, the basic material stocks typically depict resiliency, as these companies pass on the higher costs to consumers. The demand for basic materials remained robust due to the resumption of operations across major sectors. Moreover, the infrastructure bill is expected to boost the use of basic materials in the country.
Despite the favorable industry backdrop, it may not be wise to invest in basic material stock Cleveland-Cliffs Inc. (CLF) because of its fundamental weakness. The stock has declined 17.2% year-to-date. We think Nucor Corporation (NUE), Steel Dynamics, Inc. (STLD), and Friedman Industries, Incorporated (FRD) are better investments instead, given their fundamental strength.
Nucor Corporation (NUE)
NUE manufactures and sells steel and steel products through three segments: Steel Mills, Steel Products, and Raw Materials. It produces carbon and alloy steel, hollow structural section tubing, electrical conduit, steel racking, steel deck, cold finished steel, steel fasteners, insulated metal panels, and others.
On June 24, 2022, NUE acquired C.H.I. Overhead Doors (C.H.I.) from KKR & Co. Inc. (KKR) for $3 billion. This acquisition expands the company’s business and might enhance its manufacturing model.
NUE’s net sales increased 34.2% year-over-year to $11.79 billion for the second quarter that ended July 2, 2022. The company’s EBIT grew 72.3% from the year-ago value to $3.49 billion, while its net earnings increased 73.5% year-over-year to $2.73 billion. Also, its EPS came in at $9.67, representing an increase of 91.9% year-over-year.
Analysts expect NUE’s EPS and revenue for the third quarter (ending September 30, 2022) to increase 6.6% and 1.5% to $7.76 and $10.47 billion, respectively. It surpassed Street EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 26.2% to close the last trading session at $141.72.
NUE’s POWR Ratings reflect solid prospects. The company has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Quality. It is ranked #16 out of 31 stocks in the A-rated Steel industry. Click here to see the other ratings of NUE for Growth, Value, Momentum, Stability, and Sentiment.
Steel Dynamics, Inc. (STLD)
STLD is a diversified domestic steel producer and metal recycler in the United States. It operates through three segments: Steel Operations, Metals Recycling Operations, and Steel Fabrication Operations. The company is also exporting its products globally.
On July 19, 2022, STLD announced its plans to construct and operate a 650,000-tonne low-carbon, recycled aluminum flat rolled mill with two supporting satellite aluminum slab centers. The project is estimated to generate an annual EBITDA of $650 million to $700 million.
STLD’s net sales increased 39.1% year-over-year to $6.21 billion in the fiscal quarter that ended June 30, 2022. The company’s gross profit grew 57% from the year-ago value to $1.88 billion, while its operating income came in at $1.62 billion, up 69.3% from its year-ago value. Its net income rose 72.2% from the prior-year quarter to $1.21 billion. In addition, its adjusted EBITDA increased 65.6% year-over-year to $1.71 billion. Also, its EPS increased 94% year-over-year to $6.44 in the same quarter.
The consensus revenue estimate of $5.54 billion for the third quarter ending September 30, 2022, represents an increase of 8.9% year-over-year. The consensus EPS estimate of $5.02 for the current quarter indicates a marginal year-over-year increase. The company has an excellent earnings surprise history; it surpassed the consensus EPS estimates in each of the trailing four quarters.
Shares of STLD rose 34.5% year-to-date to close the last trading session at $83.49.
STLD’s strong fundamentals are reflected in its POWR Ratings. The stock’s overall B rating translates to a Buy in our proprietary rating system.
It has a B grade for Quality. Within the same industry, STLD is ranked #10. To see the other ratings of STLD for Growth, Value, Momentum, Stability, and Sentiment, click here.
Friedman Industries, Incorporated (FRD)
FRD is a manufacturer and processor of steel products with operating plants in Hickman, Arkansas; Decatur, Alabama and Lone Star, Texas. The company operates in two segments: coil products and tubular products.
On May 2, 2022, FRD acquired Plateplus, Inc.’s operations. With this acquisition, the company has expanded its operations geographically and is expected to serve a more extensive customer base.
FRD’s net sales increased 126.2% year-over-year to $285.23 million for the fiscal year ended March 31, 2022. Its earnings from operations grew 79.7% from the year-ago value to $28.26 million, while its net earnings increased 23.1% year-over-year to $14.07 million. The company’s EPS increased 25.2% year-over-year to $2.04.
The stock has gained marginally over the past six months to close the last trading day at $8.55.
FRD’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, equating to a Strong Buy in our proprietary rating system. It has an A grade for Growth, Value, and Momentum and a B for Quality. In the same industry, FRD is ranked #9.
In addition to the POWR Ratings I’ve just highlighted, click here to see FRD’s ratings for Stability and Sentiment.
NUE shares were unchanged in premarket trading Tuesday. Year-to-date, NUE has gained 25.15%, versus a -12.19% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta’s profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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