One new stock made October’s Exec Comp Aligned with ROIC Model Portfolio, available to members as of October 13, 2023.
Recap from September Picks
Our Exec Comp Aligned with ROIC Model Portfolio (-2.4%) outperformed the S&P 500 (-3.1%) from September 14, 2023 through October 11, 2023. The best performing stock in the portfolio was up 12%. Overall, 9 out of the 15 Exec Comp Aligned with ROIC Stocks outperformed the S&P from September 14, 2023 through October 11, 2023.
This Model Portfolio includes stocks that earn an Attractive or Very Attractive rating and align executive compensation with improving ROIC. This combination provides a unique list of long ideas as the primary driver of shareholder value creation is return on invested capital (ROIC).
New Stock Feature for October: Nucor Corporation (NUE: $145/share)
Nucor Corporation (NUE) is the featured stock in October’s Exec Comp Aligned with ROIC Model Portfolio. We first wrote about Nucor Corporation in June of 2023.
Nucor has grown revenue and net operating profit after tax (NOPAT) by 6% and 24% compounded annually, respectively, since 2012. The company’s NOPAT margin improved from 3% in 2012 to 16% in the trailing twelve months (TTM), while invested capital turns fell from 1.5 to 1.4 over the same time. Rising NOPAT margins are enough to offset falling IC turns and drive the company’s return on invested capital (ROIC) from 5% in 2012 to 22% in the TTM.
Figure 1: Nucor’s Revenue & NOPAT: 2012 – TTM
Sources: New Constructs, LLC and company filings
Executive Compensation Properly Aligns Incentives
Nucor’s executive compensation plan aligns the interests of executives and shareholders by tying 25% of its annual incentive awards and 50% of the cash and restricted stock portion of long-term incentive awards to annual Return on Average Invested Capital (ROAIC) relative to the “Steel Comparator Group”. The remaining 50% of the cash and restricted stock award is tied to ROAIC relative to the “General Industry Comparator Group.” According to Nucor’s proxy statement, the company’s executive compensation, which includes ROAIC as a key indicator of performance, is “designed to create long-term value for our stockholders and to reinforce a strong culture of ownership.”
The company’s inclusion of ROAIC, a variation of ROIC, as a performance goal has helped create shareholder value by driving higher ROIC and economic earnings. When we calculate ROIC using our superior fundamental data, we find that Nucor’s ROIC has increased from 5% in 2012 to 22% in the TTM. Economic earnings rose from -$13 million to $3.7 billion over the same time.
Figure 2: Nucor’s 3-Year Average ROIC: 2012 – TTM
Sources: New Constructs, LLC and company filings
NUE Has Further Upside
At the current price of $145/share, NUE has a price-to-economic book value (PEBV) ratio of 0.5. This ratio implies the market expects Nucor’s NOPAT to permanently fall by 50%. This expectation seems overly pessimistic for a company that has grown NOPAT 24% compounded annually over the past decade.
Even if Nucor’s
- NOPAT margin falls to 12% (below its 5-year average of 13%) and
- the company’s revenue grows at consensus estimates in 2023 (-14%) and 2024 (-8%) and, then, grows only 3% compounded annually from 2025 to 2032 (compared to 6% compounded annually since 2012),
the stock would be worth $191/share today – a 32% upside. See the math behind this reverse DCF scenario. In this scenario, Nucor’s NOPAT still falls 5% compounded annually through 2032.
For reference, Nucor has grown NOPAT by 24% compounded annually since 2012. Should the company grow NOPAT more in line with historical growth rates, the stock has even more upside.
Critical Details Found in Financial Filings by Our Robo-Analyst Technology
Below are specifics on the adjustments we made based on Robo-Analyst findings in Nucor’s 10-Qs and 10-K:
Income Statement: we made $893 million in adjustments with a net effect of removing $796 million in non-operating expenses (2% of revenue). Clients can see all adjustments made to Nucor’s income statement on the GAAP Reconciliation tab on the Ratings page on our website.
Balance Sheet: we made $6.6 billion in adjustments to calculate invested capital with a net decrease of $3.9 billion. One of the largest adjustments was $1.1 billion (4% of reported net assets) in asset write downs. Clients can see all adjustments made to Nucor’s balance sheet on the GAAP Reconciliation tab on the Ratings page on our website.
Valuation: we made $12 billion in adjustments, with a net effect of decreasing shareholder value by $5 billion. Apart from total debt, the most notable adjustment to shareholder value was $1.2 billion in net deferred tax liability. This adjustment represents 3% of Nucor’s market value. Clients can see all adjustments to Nucor’s valuation on the GAAP Reconciliation tab on the Ratings page on our website.
This article was originally published on October 20, 2023.
Disclosure: David Trainer, Kyle Guske II, Hakan Salt, and Italo Mendonça receive no compensation to write about any specific stock, style, or theme.
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 Our research utilizes our Core Earnings, a more reliable measure of profits, as proven in Core Earnings: New Data & Evidence, written by professors at Harvard Business School (HBS) & MIT Sloan and published in The Journal of Financial Economics.