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Motley Fool Issues Rare “All In” Buy Alert

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Many investors and money managers are preparing for a slowing economy or even recession. While cyclical industries like steel typically see sharp downturns in financial results during those periods, the leading steelmakers in the country are shrugging off economic fears and uncertainty. 

Nucor (NUE 1.99% ) and smaller peer Steel Dynamics both reported strong second-quarter earnings last week, and both continue to pour billions into growth investments. Nucor sees 2022 outpacing last year's record earnings to establish another new record. The positive comments and optimistic investment actions make it worth a look to see if Nucor stock is a buy right now. 

The strong quarterly reports from both Nucor and Steel Dynamics help reaffirm that the industry is healthy. Steel prices soared during the pandemic, and while off those peaks, they surged again after Russia's invasion of Ukraine. That helped lead Nucor to build on its bottom-line results over the past 18 months. 

Nucor established a new record in Q2 with net income of $9.67 per diluted share, or $2.56 billion. That was up from $5.04 per share in the prior-year quarter. For the first half of the year, cash flow from operations soared year over year from $1.88 billion to $4.73 billion.

NUE Cash from Operations (TTM) data by YCharts.

Much of that soaring cash flow came from the spike in steel prices. While they are more than 50% off the 2021 highs that reached $2,000 per ton, hot-rolled steel is still priced at more than $900 per ton. That's about double the price from prior to the pandemic. 

Nucor was already making significant growth investments prior to the rise in steel pricing and subsequent surge in cash flow and earnings. These have included greenfield steel mill projects, upgrades to existing mills, and expanded downstream product offerings. The chart below shows the cumulative value of those investments over the last five years and how they have accelerated recently. 

Data source: Nucor press releases. Chart by author.

And Nucor is also working to help secure its energy needs in the most sustainable ways possible. In addition to having several power-purchase agreements with solar and wind energy producers, the steel company made a private-placement investment in NuScale Power. Nucor provided capital to help commercialize NuScale's small modular nuclear reactors (SMRs). While Nucor's $15 million investment is relatively small, it shows the company is working to ensure its future energy needs are met as it grows its steel business. 

Nucor stock may not be for everyone. Stocks in cyclical industries tend to move based on economic cycles in addition to company fundamentals. Nucor's price-to-earnings (P/E) ratio is currently below 4. But some investors who play the cycle sell cyclical stocks when the P/E is at its trough, believing it indicates a peak in earnings. 

But for long-term investors who hold investments through various cycles, Nucor makes a good investment even right now. While the stock has more than doubled over the last three years, it is more than 30% below its recent high. Nucor also pays a reliable dividend with 2022 being the 50th consecutive year of dividend increases (assuming the company raises its dividend as expected later this year). 

That provides steady income as the company's recent investments come online over the next several years. That includes the creation of a new "Towers & Structures" segment after its most recent acquisitions to serve the utility, transportation, and telecommunications sectors. Those additional, or improved, facilities will contribute to continuously growing cash flow over the cycles.

That, in turn, should lead to higher highs and higher lows in the stock throughout the cycle. In the words of Nucor CFO Steve Laxton in the company's Q2 earnings call, "We remain confident that with the capital we retain and deploy, we are building a more resilient, more profitable, a more cash-generative Nucor."

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

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