Rule #1 Finance Blog

With Investor Phil Town


I got this email from Kellie on January 25. Read on. My response follows.Phil_town_122

Phil Town,

As a construction guy, I get Nucor.  They make steel.  Steel reinforced concrete has become the backbone of construction.  Most agree we have another 8 year run on total construction growth.

Nucor is a "good to great" company.   After burying Bethleham Steel, they continue to dominate their industry by being the lowest cost steel producer in the US.  As a farm kid, it's understandable why they locate plants in rural areas and utilize farm people in production.

The numbers:  EPS= 8.20, PE=9.2, Historical PE=28.86, Target Price from Investor toolbox= $277.43 (based on analists projection of between 16 and 17% growth and using hist. PE of 28.86.)

It looks to me that big money has started coming in this week.  I see Nucor as a wonderful company that has been in an industry that has been ignored lately.  Are things beginning to change?


Here's what I said:

Hey Kirk,

First, if you love Nucor, I hope you caught that big green arrow
signal to get in about a week ago!  The thing just shot up from 70 to
80, so obviously something's going on. So let's dig in a bit on some key
issues and see if this is a great, long term, predictable performer.

Kirk knows that Nucor is a great business, believes that, although
cyclical, it's going to run hard for another 8 years or so.  So I'm
going to give him the first M – Meaning.

Moat – Start with the ROIC.
  For a steel biz it's pretty decent,
hovering right around our minimum 10%.  Sales and EPS growth is huge
and accelerating.  But wait a second…  These guys go along with EPS
of $1.60 for years, then drop down to $0.40 and then explode to $7?

wonder Mr. Market is so dubious about giving Nucor a normal multiple of
its earnings.  Did you notice on the Performance button that the PE was
70 back in 2002-2003 but dropped to a range of 4-7 in 2004 and 2005?
You're seeing serious doubts about the potential of this business to
sustain this level of earnings.
And you should probably share those
doubts unless you really know that industry and how Nucor is going to
keep up this level of earnings.

But if you can get comfortable with that, and if you really like the
CEO, this thing really is on sale and has a huge MOS.  Even with an
expected 12% growth (the growth rate of its equity over the last ten
years) and a 24 PE that SHOULD go with that rate of growth, this thing
is still on sale big time.

So how do you get comfortable with the future of a business that, based
on its history, is unpredictable? 
You treat it like you would a start
up and ignore the past and focus on the future.  But man, you have to
know your stuff.

And here's the bad news:  Only two analysts felt comfortable enough
with their knowledge of the business to hazard a prediction of its
future growth rate.
One is guessing 15% — a bit above the equity
growth rate.  The other is saying 2.5%.  So the 'average' of 9% being
used by Investools to figure out a value is just a complete crap
shoot.  You are really on your own here, Kirk, in trying to predict
the future.  Obviously if you get it right, this is going to be a big
win and clearly from the big jump in the last week, as you said, the
big guys are moving in on what might be a really undervalued business.

Because of the lack of historical consistency, this can only be a Risky
Biz investment:
No more than 10% of your investment capital.  That said,
if you like it and are comfortable that the future is good, then TGFTA
— (Thank God For The Arrows).  You get a chance to jump in on green,
this could work out good for you.  But buckle your seat belt and watch
the arrows, brother, because this ride is going to be bumpy!

Now go play!

Phil Town