On Thursday, Morgan Stanley adjusted its stance on Nucor Corporation (NYSE:NUE) stock, upgrading it from Equalweight to Overweight, while revising the price target to $176 from $187.
The firm expressed a preference for stocks with lower beta or defensive qualities for the second half of 2024, highlighting a potential 25% upside for Nucor shares.
The upgrade comes as Nucor's stock valuation has fallen in comparison to its peers, despite anticipation of strong earnings growth and robust cash generation for the years 2025 and 2026.
Morgan Stanley's analysis indicates that Nucor is trading at a discount relative to Steel Dynamics (NASDAQ:STLD) based on 2025 enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) multiples (0.99x for Nucor versus 1.11x for Steel Dynamics). Additionally, the price-to-earnings (P/E) premium of Nucor is below its five-year average.
The firm's preference for Nucor over Cleveland-Cliffs Inc. (NYSE:NYSE:CLF) is influenced by the forecast of subdued automobile output and demand in the latter half of 2024, which is expected to restrict the growth of flat steel prices and limit Cleveland-Cliffs' earnings recovery.
Morgan Stanley also notes the recent uptick in the Dodge Momentum Index, indicating an increase in projects entering the construction pipeline, a positive sign for Nucor, given its significant exposure to the nonresidential construction sector.
Morgan Stanley's outlook for Nucor is based on the expectation that the company's projected earnings growth is not fully reflected in its current market valuation. The firm's analysis suggests that the market has not adequately priced in Nucor's financial prospects, particularly when compared to its industry counterparts.
In other recent news, Nucor Corporation announced mixed results for its second quarter. The steel production leader reported earnings of $2.68 per diluted share for the quarter, with year-to-date earnings reaching $6.14 per diluted share. Despite a 23% decrease in net earnings from the first quarter, the company maintains a strong financial position and continues to expand operations through strategic acquisitions and capital investments.
Nucor repurchased 2.9 million shares for $500 million and received a positive outlook from Moody's (NYSE:MCO). The company is also focusing on sustainability through investments in low-copper shred and electric technology, while advocating for fair trade practices. However, they anticipate lower consolidated earnings in the third quarter, primarily due to expected lower earnings in the Steel Mill segment.
The company is planning capital spending of about $3.5 billion for the current year, with an emphasis on long-term growth. Despite challenges in net earnings and decreased margins in some segments, Nucor's strong investment-grade balance sheet and positive developments in automation and AI position it well for future market demands. These are recent developments in the company's strategic growth and adaptation journey.
InvestingPro Insights
Morgan Stanley's upgrade of Nucor Corporation (NYSE:NUE) to Overweight is supported by several key factors as indicated by real-time data and InvestingPro Tips. With a market capitalization of $33.53 billion and a favorable P/E ratio of 10.16, Nucor's financial health appears robust. The company's dedication to shareholder value is evident through its aggressive share buyback strategy and a commendable track record of raising its dividend for 14 consecutive years, underscoring a high shareholder yield. Furthermore, Nucor's stock is noted for its low price volatility, providing a degree of stability for investors.
InvestingPro Tips highlight that Nucor is a prominent player in the Metals & Mining industry with a strong return over the last five years. The company's cash flows can sufficiently cover interest payments, and its liquid assets exceed short-term obligations, indicating a solid financial position. Additionally, analysts predict Nucor will be profitable this year, having been profitable over the last twelve months. It's also worth noting that there are 15 additional InvestingPro Tips available for Nucor, offering a deeper dive into the company's financial nuances and investment potential.
While the stock is trading near its 52-week low, this could present a buying opportunity for investors, especially considering Morgan Stanley's revised price target and the potential upside. The InvestingPro Fair Value estimate of $146.09 suggests that the stock may be undervalued, providing further credence to Morgan Stanley's optimistic stance. For a comprehensive understanding of Nucor's investment profile and additional insights, interested parties can explore further on InvestingPro.
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