This Just In: Nucor Stock Upgraded

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

It's been nearly a year since President Trump was elected on (among other things) a promise to "Make America Great Again" with a $1 trillion plan to rebuild the nation's infrastructure. But investors have seen little evidence of new infrastructure being built (nor even a single wall) since then.

Worse, even promises to use only U.S.-made steel on existing infrastructure projects appear to be eroding. Worries that the Trump presidency won't be as good news for steel stocks as investors once thought contributed to a series of negative reports on steelmaker Nucor (NYSE: NUE) over the past few weeks, with analysts like KeyBanc and Morgan Stanley lining up to downgrade Nucor stock.

And yet, despite the disappointments, hope springs eternal for one analyst: Citigroup. Here are three things you need to know about that.

Image source: Getty Images.

1. Citigroup calls a bottom

This morning, analysts at Citigroup broke from the naysaying pack to announce they're upgrading Nucor stock from neutral to buy and assigning Nucor a $65 price target. If Citi is right about that, investors today stand to reap better than a 21% profit on Nucor. Combined with the stock's healthy 2.8% dividend yield, that works out to roughly 24% in potential profit over the next 12 months.

But is Citigroup right?

2. Crunching numbers

Citi cites Nucor's disappointing share performance relative to the rest of the market as key to its buy thesis. Since President Trump was elected on a promise to rebuild America's infrastructure (a structure built on steel bones), Nucor stock is actually down, not up -- and down by a not-insignificant 9%. Adding insult to injury, Citi notes in a write-up covered by StreetInsider.com (requires subscription) that Nucor shares have fallen 10% year to date -- a mirror image to the S&P 500's 10% gain.

Yet according to Citi, this Nucor sell-off makes no sense. There is "a disconnect between NUE's lackluster share-price performance ... and underlying fundamentals." And how! Nine months ago, in the quarter of Trump's election, Nucor earned $222 million in its fiscal fourth quarter 2016. The company's most recent quarterly report, however, shows steel profits up more than 45% from that level -- $323 million earned in Q2 2017. Nor is this only a seasonal phenomenon. Compared to last year, Nucor's profits are up a healthy 32% over fiscal Q2 2016 levels.

3. Predicting numbers still to come

And that's not all. Whether or not America gets its infrastructure building in gear, Citi points out that over in China, steel capacity is being wound down. This will be a boon to Nucor (by lessening competition from imports), even without new infrastructure investment, and even if the Trump administration doesn't follow through on promises to impose Section 232 trade protection tariffs and quotas on imported steel. Meanwhile, "steel prices in key products appear well supported," says Citi, which suggests new tariffs may not even be necessary to keep Nucor's profits rolling in.

For that matter, Nucor itself thinks things are going just swell in the steel sector. As TheFly.com reported shortly after Nucor announced earnings in July, Nucor CEO John Ferriola sees Nucor's H2 playing out much like H1 did. "[E]nergy and heavy equipment" demand for steel, said Ferriola, is still "improving." And while "automotive market demand is pulling back somewhat," Nucor is making up for that by taking market share from its rivals. Ferriola noted at the time that Nucor only held about a "mid-single-digits percentage share" of the market for automotive sheet steel. On the one hand that's small. On the other, it gives the company "plenty of room ... to grow" even if the rest of the industry is cyclically shrinking.

What it means to investors

I have to say that, for a stock priced at only 15 times earnings but pegged for nearly 23% long-term annual earnings growth on Wall Street, this all sounds pretty propitious. And here's another thing that should encourage investors in Nucor stock:

Just this week, engineering consulting firm HNTB Corp published a poll that indicated significant support among voters for President Trump's infrastructure plan should he decide to proceed with it. As Reuters reports, "nearly three-quarters of Americans are willing to pay increased taxes or tolls to fund roads and other transportation infrastructure," and this support would rise to 84% if taxpayers could be assured that such taxes and tolls would be guaranteed to go to infrastructure investments and not be diverted to other projects.

So to sum up, in Nucor stock we have a fair valuation, strong growth expectations, management promising strong results in H2 (and delivering strong results in H1), and the potential for voter support helping to make the long-awaited infrastructure plan a reality. Sounds like a good bull argument for Nucor stock to me.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Nucor. The Motley Fool has a disclosure policy.

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