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United States Steel Corporation (X), Nucor Corporation (NUE): What Is the Best Way to Play a Steel Turnaround?

With a majority of metals producers having a very difficult 2013 so far, it is becoming tougher to find bright spots in the sector. However, the minimill-steel producers have actually performed well, with sector-leader Nucor Corporation (NYSE:NUE) very close to its 52-week high. Why are shares of Nucor and other minimill steelmakers not as beaten down as some other steel plays, such as United States Steel Corporation (NYSE:X) ? Also, would investors be better off looking into one of the poorly performing companies?

What is a minimill?

Nucor Corporation (NYSE:NUE)

Before we get into Nucor Corporation (NYSE:NUE) itself, let’s do a quick rundown of minimills and steel production. A minimill is a steel production method where an electric arc furnace is used to melt scrap steel recycled from various sources, such as automobiles. Other steel makers use blast furnaces used by integrated steel mills to turn raw materials into liquid iron for steel production.

About Nucor

Not only is Nucor Corporation (NYSE:NUE) the largest minimill steelmaker in the U.S., it is the largest overall steel producer in the country as well. Nucor is also the largest recycler in North America of any material, with almost 20 million tons of steel produced annually from recycled steel. The company produces steel products for a variety of uses, including beams, steel joists, concrete reinforcing steel, fasteners, framing, and wiring to name a few.

Nucor Corporation (NYSE:NUE) plans to grow through increasing efficiency in its existing operations and developing new technologies for steel production, as well as by strategic acquisitions that it feels will add value to its operations. Most recently, Nucor acquired steel-foundation distributor Skyline Steel last June for $684 million, and 2013’s revenue should begin to reflect the benefits of this.

A little expensive, isn’t it?

At first glance, Nucor Corporation (NYSE:NUE) appears to be a bit on the pricey side at about 31.5 times  trailing-12 month earnings. The steel industry’s profitability is expected to begin to rebound over the next several years, and this should lead to better profit margins and therefore higher earnings. As a result, the company is expecting to earn about $1.72 per share this year, which is expected to rise to $3.60 and $4.41 in 2014 and 2015, respectively. So, although it looks very expensive, Nucor trades for just 12.2 times next year’s projected earnings.

While this looks excellent, bear in mind that the rebound of the steel industry is far from certain. Earnings estimates for this year range from $1.23 to $2.39, which implies that the 20 analysts who follow the company don’t really have a firm picture of what’s going on with the company. Further out, the estimates get even less precise, with 2015’s earnings projections varying between $3.15 and $5.39, a huge discrepancy.