Can Nucor iron out problems with prices?

• Author: Williams, Christopher C.
• Position: Nucor Corp.

For almost three decades, Nucor Corp. [NUE-NYSE] has employed innovative technology, a maverick spirit and management savvy to build one of the most dominant companies in the rough-and-tumble steel industry. But the Charlotte-based company now faces intense competition in its markets, fluctuating prices for some steel products and a slowing economy. Many investors are wondering, can Nucor stand the heat?

For some, the answer is no. After surging above $70 in 1994 on the general strength in steel stocks, Nucor's share price melted to the low $40s last year. Steel-price increases have since spurred the stock, which at the end of January traded at about $58. But timid investors wonder whether Nucor will have a hard time continuing its stellar growth.

Most analysts aren't so pessimistic. "This company performs at its best when [it faces] significant challenges and competition," says Gregg S. Lucas, an analyst with Interstate/Johnson Lane in Charlotte. "This is a company I wouldn't bet against over the long term." Christopher Plummer, director of steel services for Research Strategies in Exton, Pa., adds, "Nucor hasn't lost any of its luster."

How Nucor gained that luster has inspired awe and envy in the steel industry. Since it began producing steel 27 years ago, the company has been red-hot. Production zoomed from 7,000 tons a year in 1969 to an estimated 8 million tons last year. The company is the nation's fourth-largest steel producer and, driven by aggressive expansion, will likely threaten U.S. Steel's No. 1 position in several years. Over the last 10 years, sales and earnings have grown 350% and 390%, respectively, both well above the industry average, notes Chicago-based Kemper Securities analyst Clay Hoes.

How has Nucor risen so far so fast in a declining industry? One of the major reasons is management's eagerness to adopt new technologies to lower costs, analysts say. In 1989, Nucor's Crawfordsville, Ind., plant became the first to use continuous thin-slab casting to produce flat-rolled steel, used in automobiles and appliances. The process cut Nucor's labor costs and cemented the company's position as the industry's low-cost producer.

To protect itself against volatile prices for scrap, its raw material, Nucor is building the world's first commercial-scale iron-carbide plant in Trinidad. Nucor wants to substitute the cheaper iron carbide for about 20% to 30% of its scrap and might even sell the material to other minimills. "This is...