STOCK WATCH


Nucor: Don't Heed Its Warning

Jeffrey R. Kosnett

Shares of this large steelmaker still are a good bet despite a profit warning from the company.



The news out of Nucor's headquarters in Charlotte, N.C., drew liberally from the playbook of corporate jargon. Earnings will be "significantly impacted." Sales are showing "softness." There's "uncertainty in the future direction of the market" for steel because of the housing slump and the overall economy. You get the idea.

Nucor (symbol NUE), America's largest steelmaker by total stock market value and second by revenues, said September 12 that when it announces third-quarter profits in the middle of October, earnings per share will trail the $1.70 earned in the year-earlier period by 32% to 35%. It added, more ominously, that profits will fall short of analysts' average estimate of $1.23 per share for this year's period by as much as 11%.

The company's shares, however, climbed after Nucor issued its profit warning.

The company announced the coming shortfall before the market opened on September 12. The stock, which had closed at $53.46 the previous day, closed at $56.30 on the day of the disclosure. It closed at $58.77 on September 19, down 0.2% for the day.

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These warnings are usually a blow to stockholders. Sonoco Products (SON), which makes packaging materials, warned of weak third-quarter earnings September 18, only hours before the Federal Reserve lowered the target for the federal funds rate by half a percentage point and sent investors into a buying stampede. The thundering herd nonetheless trampled Sonoco's shares. They started the day down 7% and stayed down.

The most notorious profit warning in recent history has to be the one from Apple's Steve Jobs in September 2000. Jobs said that Macintosh sales were slowing rapidly and that earnings would "hit a speed bump" in the final quarter of the fiscal year that was to end that September 30. The stock fell 53%, from $53.50 to $25, when trading began the next day.

So what is the difference between profit warning A and profit warning B? If you own a stock and the company issues discouraging news, what should you expect?

Here's a guide, from Rob Arnott, an experienced investor and chairman of Research Affiliates, a money-management company in Pasadena, Calif.

Says Arnott: Your stock should survive okay if "the market hasn't priced the stock to reflect the expectation of perfection and there's no sign that things are changing to the long-term outlook for the company."

This is a good description of the Nucor case. The stock was nowhere near its 52-week high, nor did it carry an inflated price-earnings ratio on the day of the warning, so you could hardly call the shares "priced for perfection."

Plus, most of the yardsticks for the steel industry -- or at least the non-unionized, mini-mill segment of it -- remain positive. Prices for scrap steel, which mini-mills use in production, have been rising, but that should stop soon. The slowdown in U.S. car manufacturing hurts, but flat-rolled sheet steel used for autos is only 10% of Nucor's sheet sales, and that in turn is only one of Nucor's many product lines.

Moreover, although Nucor (and other domestic steel producers) complain about surging imports from China, there are fresh reports questioning the quality of Chinese steel. All of this should support Nucor's production volumes and profit margins and boost its stock.

Credit Suisse just added the company to its focus list, citing the Fed's rate cuts as positive for the economy. At today's price, Nucor trades at 11 times estimated 2008 profits. That's less than the historical average of 14 times year-ahead earnings.




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