The American dream includes a great many things, and Nucor (NYSE: NUE) and Steel Dynamics (NASDAQ: STLD) offer two different versions of achieving that dream. Both operate in the North American steel industry, with virtually all of their operations in the United States.
Here’s how Nucor and Steel Dynamics have achieved the American dream, and why they could both be worth buying right now.
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Nucor rises from the ashes
Before Nucor was a steel company, it was a bankrupt provider to the nuclear power industry. This was more than 50 years ago now, so that history is often forgotten on Wall Street. But it is foundational to Nucor’s identity.
At that time, the company started using electric arc mini-mills within its business, and the technology was so good that Nucor was able to emerge from bankruptcy with a new business focus. Today, it is one of the largest and most diversified steelmakers in North America.
Image source: Getty Images.
Electric arc mini-mills tend to be more flexible than the blast furnaces that dominated the steel industry decades ago. To simplify things, mini-mills can be ramped up and down more easily with demand fluctuations, allowing for a more profitable business through the cycle. This is important because steel is a highly cyclical industry, given steel’s importance to economic activity.
That said, Nucor has also focused on moving up the value chain, by increasingly making steel products (like building components) from the bulk steel it makes. That has improved margins and helped to soften the impact of cyclical downturns.
The brush with bankruptcy, meanwhile, has left Nucor with a conservative ethos. It tends to focus on having a strong balance sheet, for starters. But it also has a habit of investing during industry downturns so it can come out the other side a stronger company. That kind of investment is what is happening right now, even as soft steel demand and prices have caused the stock to fall dramatically from its recent peaks.
For long-term investors, however, this is exactly when buying makes the most sense, since the cyclical industry is highly likely to recover again, just like it has many times before.
Steel Dynamics follows in the footsteps of its big brother
Steel Dynamics is a relatively young steel company that also makes use of electric arc mini-mills. That makes complete sense, however, because it was founded by former employees of Nucor. Management has basically taken every aspect of Nucor’s business model and applied it to Steel Dynamics’ business. That said, it is a faster-growing company because it is a smaller company, which may be of more interest to some investors.
Steel Dynamics has taken a slightly different path, though. While Nucor has focused exclusively on steel and steel products, Steel Dynamics is venturing into the aluminum sector. The technology being used is similar, so this isn’t a huge stretch. And it offers another avenue for growth, as the company builds out a second business line.
Steel Dynamics’ stock hasn’t fallen as far as that of Nucor, so it probably isn’t as big a bargain today. However, given the growth opportunity ahead of it in steel and in aluminum, it makes sense that investors are a little more upbeat about Steel Dynamics’ future.
NUE data by YCharts
Tariffs help solve a global problem for Nucor and Steel Dynamics
Nucor and Steel Dynamics are two of the best-run steel mills in North America. But steelmakers aren’t immune from global issues, as foreign countries often sell steel into the U.S. market at low prices. The U.S. steel industry contends that those low prices amount to dumping, which hurts companies like Nucor and Steel Dynamics. However, tariffs are often put in place to protect these steelmakers from such actions.
All in, the tariff upheaval in the world could actually end up being a net benefit for Nucor and Steel Dynamics. And given the stock price pullbacks that both have experienced, particularly Nucor, both of these steel industry leaders are cheaper than they have been. If you want to buy American, Nucor and Steel Dynamics are two U.S.-based businesses you should definitely be watching today.
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Reuben Gregg Brewer has positions in Nucor. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
