President-elect Donald Trump is set to be inaugurated on Jan. 20, just a few days away. U.S. markets have whipsawed since the November election. Steel stocks, which were at the forefront of the “Trump trade” during his first presidency, rallied sharply after he was elected for the second time. However, steel stocks also come off their November highs presenting, a buying opportunity.
Trump’s tariff talk is welcomed by U.S. steel executives, who often blame cheap imports for their woes. In his first term, Trump levied a 25% tariff on imports under the pretext that they were a risk to “U.S. national security.” Over the course of his four-year term, Trump began to scale back those tariffs. His successor President Joe Biden relaxed the tariffs even further. The U.S. steel industry is hopeful that Trump will again try to bail out domestic steel companies.
Nucor Is the Largest U.S.-based Steel Producer
Nucor (NUE) is the largest U.S.-based steel producer and would be among the biggest beneficiaries of any steel tariffs that Trump imposes. That said, the industry is also grappling with weak demand in several end markets. The global macroeconomic environment has also been challenging, and steel prices (HVN25) weakened significantly last year, putting pressure on margins. The pessimism is reflected in Nucor’s price action and it is trading close to its 52-week lows.
The company stands out from most of its U.S.-based peers, thanks to its relatively stable earnings and a strong balance sheet. Nucor produces steel in mini-mills and hence, the variability in its earnings is not as high as peers who produce steel in blast furnaces.
Nucor also had $4.9 billion in cash and cash equivalents at the end of September. The company has been quite judicious with capital allocation, spending money on growth projects, along with generous dividends and share repurchases. Many of Nucor’s growth projects will come online over the next two years and potentially help the company increase its market share even further.
Nucor Is a Dividend Aristocrat
We typically associate Dividend Aristocrats with sectors like food and healthcare which have stable and usually linearly upwards-trending earnings. The metal and mining industry is quite cyclical in nature, and even global mining giants BHP Billiton (BHP) and Rio Tinto (RIO) had to ditch what was known as their “progressive dividend policy” wherein they increased the dividend every year. Nucor stands is a rare exception and has increased its base dividend since 1973. Its current dividend yield stands at nearly 1.9%, which is higher than what the average S&P 500 Index ($SPX) constituent pays.
As Argus Research analyst John Eade aptly said, "We view Nucor as a well-run company with a strong track record in its industry. The company is poised to take advantage of megatrends such as the rebuilding of U.S. infrastructure, the transition to alternative energy sources, and manufacturing onshoring."
Nucor has a consensus rating of “Moderate Buy” from the 13 analysts actively covering the stock and its mean target price of $155.54 is almost 32% higher than Jan. 10 closing price. Sell-side analysts see a recovery in NUE stock after a dismal 2024 when it was among the worst-performing S&P 500 stocks.
Should You Buy Nucor Stock Ahead of Trump’s Inauguration?
While any tariffs on steel imports would be a welcome step for U.S. steel producers, the beleaguered sector would need a lot more for investor sentiment to turn around. Steel companies’ earnings are highly dependent on steel prices, which have sagged. Nucor incidentally is expected to report a year-over-year fall in its Q4 profits when it reports earnings later this month.
China’s slowdown is a big risk for steel prices, and while the country has taken several steps to revive growth, these measures have yet to show any meaningful impact with analysts calling for even more economic weakness for the nation.
I would however stay cautiously optimistic about U.S. steel stocks in 2025 amid expectations of an uptick in metal prices. Nucor trades at a forward enterprise value-to-EBITDA ratio of 8.4x, which while not mouthwatering, looks reasonable at this point in the cycle.
U.S. steel prices might have bottomed out and should see some recovery – even if not a mega rebound this year. Overall, I find Nucor’s risk-reward profile quite balanced at these price levels with Trump’s steel tariffs being a wild card that could drive significant upside from these levels.
