In August, President Joe Biden signed the CHIPS and Science Act into law, sending semiconductor stocks higher in the process as the U.S. government aims to invest more than $52 billion to revive the domestic semiconductor industry.
Last week, applications were received from chip companies willing to obtain government funding. For decades, American chipmakers have aggressively invested in East Asian countries such as China and Taiwan to expand their manufacturing capacity. As a result, these companies now depend on global supply chains to conduct their business, which has become a cause for concern from a national security perspective at a time when tensions are rising between the U.S. and China.
Multibillion-dollar federal investments are expected to promote domestic chip manufacturing. Last week, the U.S. Commerce Department highlighted certain rules that need to be followed by chipmakers who receive federal funds. Some of the main conditions include sharing excess profits with the government, limiting shareholder distributions and prohibiting investments in certain foreign territories.
In addition to these conditions, semiconductor companies are obliged to use American-made iron and steel to construct production facilities. As a result, federal investments made under the CHIPS Act are likely to help U.S. steel companies thrive, and Nucor Corp. (NUE, Financial) seems well-positioned to benefit from this tailwind.
The promising macroeconomic outlook
After reaching a high in 2021, steel prices declined sharply through December 2022. So far this year, prices have recovered, aided by production disruptions in two mills run by Nucor and Steel Dynamics (STLD, Financial), a decline in mill utilization rates in the industry and a decrease in imports. The strong demand for steel coming from Turkey as the country rebuilds from the earthquake catastrophe has also pushed steel prices higher in recent weeks.
The industry also benefits from favorable policy decisions, such as the Infrastructure Investment Act and the CHIPS Act. Despite a notable slowdown in residential construction activities as a result of rising interest rates, nonresidential construction spending remains strong, aided by billions of dollars injected by the government to support infrastructure development projects. According to data from the Federal Reserve, nonresidential construction spending declined in December, but quickly recovered in January, in line with expectations. Continued federal spending will keep the demand for steel at an elevated level, thereby helping steel manufacturers such as Nucor.
The Biden administration’s long-term goal of embracing renewable energy sources is another driver for steel producers as substantial investments are required to build the necessary infrastructure to support it. The success of the electric vehicle industry also depends on the availability of charging stations, and steel producers will have a major role to play in helping America transition into a future dominated by EVs.
Investing for growth
To make the most of the promising long-term outlook, Nucor is investing aggressively to expand its scale. These investments include funds allocated to acquire companies and reinvestments in the business to expand the manufacturing scale. The company has already announced seven new projects for the next few years, including a West Virginia mill with advanced processing capabilities and a tube expansion at Gallatin. These investments are expected to result in efficiency gains, reduce conversion costs and lower greenhouse gas intensity. Nucor’s goal is to become a steel manufacturer and processor that caters to requirements across the steelmaking portfolio, and these investments are spread across different business segments.
Financials, valuation and dividend
Nucor’s revenue grew 14% in 2022 on the back of a strong 2021, in which revenue grew by a staggering 81% aided by record-high steel prices. From just $722 million in pandemic-stricken 2020, Nucor’s net income swelled to over $7.6 billion in 2022, highlighting the eye-catching financial performance of the company in the last couple of years.
On the back of this strong performance, Nucor’s stock has gained almost 500% since bottoming in March 2020. Still, the company is valued at a forward price-earnings ratio of 14 currently, suggesting the massive run was fueled less by speculation and more by robust earnings. If earnings continue to grow as predicted in the next five years, the company will deliver handsome returns to investors even if the earnings multiple does not expand from current levels.
Nucor’s attractive dividend is another reason to bet on the company. It aims to distribute at least 40% of its earnings to shareholders via dividends and buybacks, and the company is among an elite list of American companies with an extensive history of dividend distributions. The company has also increased its dividend in each of the last 49 years, which makes it one of just 64 companies in the S&P 500 with a similar track record. Consistent buybacks, on the other hand, have helped Nucor to reduce its share count by more than 70 million since 2017, thereby allowing shareholders to get a larger piece of the pie without additional investment.
Nucor does not have any debt maturing in 2023, 2024 or even in 2025; it only has to repay $1 billion in debt. The majority of the company’s debt will mature beyond 2029, which leaves ample room for it to bring in cash flows from new investments.
Takeaway
As one of the largest U.S. steelmakers, Nucor is well positioned to benefit from the Biden administration’s massive infrastructure development projects, including the Infrastructure Investment Act and the CHIPS Act. The company seems fairly valued and pays a safe dividend that yields 1.1%. With prospects for steady earnings growth in the next five years, the stock could be a good bet for value investors.
