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Cramer’s Investing Club: Nucor’s stock plunge doesn’t reflect longer term potential

Bundles of steel from Nucor Corp. sit for sale to at Thompson Building Materials in Lomita, California, U.S., on Thursday, Aug. 30, 2012.

Patrick Fallon | Bloomberg | Getty Images

(This article was sent first to members of the CNBC Investing Club with Jim Cramer. To get the real-time updates in your inbox, subscribe here.)

Nucor (NUE), a Charitable Trust holding, plummeted Wednesday despite management providing seemingly rosy earnings guidance for the fourth quarter.

Profits in the quarter are expected to be a new record for the company, with management guiding earnings per share in the range of $7.65 to $7.75, up from $7.28 in the third quarter.It is rare to see the stock of a company that has been around for 70 years fall 8.6% on news of record quarterly profit, but expectations matter, and the consensus street estimate heading into the announcement was $7.95.

Looking out, Nucor provided limited, yet encouraging commentary about their prospects for next year. “As we approach the end of the most profitable year in Nucor’s history, demand continues to be strong in most of the end markets we serve,” the company said in the press release. “We are confident that 2022 will be another year of strong profitability for Nucor.”

We note that the current consensus estimate on FactSet calls for earnings per share to drop to $17.31 in 2022 from approximately $23.23 this year. We’ve been in the camp that the steel market will be more resilient next year than what the market thinks, due in part to the recovery of auto production and new investments in oil and gas. If estimates are proven to be too low and are revised higher, Nucor’s stock price should follow in the same direction.

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Outside of steel forecasts, we like how Nucor is still buying back a ton of stock. The company said repurchased approximately 13.5 million shares at an average price of $111.63 during the fourth quarter and this level of activity should continue next year following the Board’s recent approval of a new $4 billion program. And by the way, the company just increased its quarterly cash dividend by 23%.

In other capital allocation news, we should point out that on Monday, Nucor reached agreements to acquire a majority ownership position in California Steel Industries. Nucor will pay $400 million for 50% the enterprise value, which prices the ownership at less than 6x historical average EBITDA. The deal increases Nucor’s presence on the West Coast and this consolidation is a way for Nucor to improve its capability without putting on extra capacity.

So what do we make of the move today? We would have hoped for a better number in the quarter, but we do not think the small size of the miss justifies 8.6% decline in the stock price today. Investors may be concerned that Nucor’s profits have reached its peak, but a higher for longer pricing environment still makes Nucor one cheap stock by market standards.

After booking some profits at around $120 in late November, we would buy Nucor off this decline if we didn’t already own a position for the Charitable Trust. But as noted earlier today, we are not ready to buy back lower the shares we sold higher because we are waiting for a level that would improve our average cost basis of $101.46.

The CNBC Investing Club is now the official home to my Charitable Trust. It’s the place where you can see every move we make for the portfolio and get my market insight before anyone else. The Charitable Trust and my writings are no longer affiliated with Action Alerts Plus in any way.

As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. See here for the investing disclaimer.

(Jim Cramer’s Charitable Trust is long NUE.)

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