Here is a look at how Nucor (NUE) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:
Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?) :
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
- Earnings Stability - positive earnings per share for at least 10 straight years - FAIL
- Dividend Record - has paid a dividend for at least 10 straight years - PASS
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
- Moderate PEmg ratio - PEmg is less than 20 - FAIL
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
- Earnings Stability - positive earnings per share for at least 5 years - FAIL
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - FAIL
Valuation Summary (Explanation of the ModernGraham Valuation Model)
Key Data:
| MG Value | $0 **Rare Situation. See Conclusion. |
| MG Opinion | Overvalued |
| Value Based on 3% Growth | $22 |
| Value Based on 0% Growth | $13 |
| Market Implied Growth Rate | 12.36% |
| Net Current Asset Value (NCAV) | -$3.20 |
| PEmg | 33.23 |
| Current Ratio | 3.24 |
| PB Ratio | 2.12 |
Balance Sheet - 9/30/2013
| Current Assets | $6,468,900,000 |
| Current Liabilities | $1,993,500,000 |
| Total Debt | $4,380,200,000 |
| Total Assets | $15,091,800,000 |
| Intangible Assets | $2,880,000,000 |
| Total Liabilities | $7,486,600,000 |
| Outstanding Shares | 318,210,000 |
Earnings Per Share - Diluted
| 2013 (estimate) | $1.34 |
| 2012 | $1.86 |
| 2011 | $2.71 |
| 2010 | $0.65 |
| 2009 | -$0.75 |
| 2008 | $7.01 |
| 2007 | $4.94 |
| 2006 | $5.68 |
| 2005 | $4.13 |
| 2004 | $3.51 |
| 2003 | $0.20 |
| 2002 | $0.52 |
Earnings Per Share - Modern Graham (Calculating EPSmg)
| 2013 (estimate) | $1.52 |
| 2012 | $1.84 |
| 2011 | $2.19 |
| 2010 | $2.46 |
| 2009 | $3.64 |
| 2008 | $5.57 |
Conclusion:
Nucor is a company that needs to stabilize its earnings as soon as possible. As it stands, the company is not suitable for either the Defensive Investor or the Enterprising Investor primarily because of the instability of the earnings and lack of growth. From a valuation standpoint, the company presents a situation where any value must come from the balance sheet because the earnings history does not support a positive estimate of growth. The company's EPSmg (normalized earnings) have dropped significantly each year over the historical period we've reviewed. Meanwhile, the market is implying the company will grow at over 12%. Even if you assume the earnings will not drop any further, and will grow at 3% going forward, the valuation would only be $22, well below the market's current level. As a result, any value must come from the balance sheet rather than earnings, and the clearest metric of balance sheet value is the Net Current Asset Value (NCAV). Unfortunately, Nucor's NCAV is negative. Therefore, not only is the company considered speculative based on the failure to meet the Defensive Investor or Enterprising Investor's requirements, it should be considered speculative from a valuation basis as well. The fundamentals simply do not support a solid valuation at this time.
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