Nucor's Independence Tube Purchase Is No Surprise
The announcement of additional acquisitions remains a distinct possibility for this steelmaker, thanks to its healthy balance sheet, sizable cash position, and free cash flow generation.
On Sept. 19, Nucor (NUE) announced the acquisition of Independence Tube Corporation (ITC) for a total consideration of $435 million. Per the company's press release, this figure is roughly six times ITC's average annual EBITDA from 2013 to 2015. The price paid falls in line with the 6.0 times midcycle EV-to-EBITDA multiple that we assign to Nucor in our valuation model. To reflect the impact of the ITC acquisition, we've raised our EBITDA forecasts for Nucor by roughly $70 million annually over our explicit forecast period. The impact of higher profits is largely offset by the purchase price and, therefore, our fair value estimate for Nucor is unchanged at $35 per share. Due to our outlook for falling steel prices and elevated import volumes, Nucor and every other U.S. steelmaker under our coverage is trading at a premium to fair value.
This acquisition marks Nucor's largest since its $770 million purchase of Gallatin Steel in 2014 and its $605 million acquisition of Skyline Steel in 2012. Given Nucor's healthy balance sheet, sizable cash position of $1.8 billion at the end of the second quarter, and solid free cash flow generation, we aren't surprised at the announcement of an acquisition. The announcement of additional, although likely smaller, acquisitions remains a distinct possibility, consistent with Nucor's $29 million tuck-in acquisition of Joy Global's Texas steel plate mill in July.
ITC provides Nucor with additional exposure to the nonresidential construction end market, as the company produces 600,000 tons of hollow structural sections (HSS) annually. For comparison, Nucor's Steel Mills segment shipped 2.2 million tons of structural steel in 2015. Manufactured in round, square, and rectangular shapes, HSS are typically used in nonresidential construction applications including buildings and bridges. Nucor will likely supply ITC's facilities via its nearby sheet mills in Alabama, Indiana, and Kentucky.
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Andrew Lane does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.