On Feb 26, we issued an updated research report on Reliance Steel & Aluminum Co. (RS). While the company is well placed to leverage the strong momentum across a number of end-use markets, it remains exposed to a weak pricing environment and a still soft non-residential construction market.
The metal processor posted lower-than-expected fourth-quarter 2013 results, on Feb 20, with both revenues and adjusted earnings missing Zacks Consensus Estimates. Profit fell by double-digits on lower pricing and higher costs. The company, however, expects demand environment to improve in first-quarter 2014.
Reliance Steel, a Zacks Rank #3 (Hold) stock, has tremendous earnings capacity with its broad and diversified product base, along with a wide geographic footprint that positions it well in the industry. The company continues to evaluate and execute additional growth projects and is poised to gain from strong momentum across a number of markets, including automotive and aerospace.
Reliance Steel continues its aggressive acquisition strategy to boost growth. The acquisition of steel and aluminum components maker Metals USA is a strategic fit with the company’s portfolio and complements its existing customer base, product mix and geographic footprint. The company is also focused on growing its business organically.
Reliance Steel also remains committed to offer incremental returns to its shareholders. The company recently raised quarterly dividend by 6% to 35 cents per share. It increased its quarterly dividend twice in 2013 and made dividend payments of roughly $97 million during the year, up 61% year over year.
However, Reliance Steel remains challenged by weak steel industry fundamentals. The U.S. steel industry has been hit by increased imports of cheaper steel products. The industry remains affected by overcapacity that continues to outpace demand.
Moreover, Reliance Steel still contends with a soft steel and metals pricing environment. Average selling prices fell 10% year over year in 2013. The overall pricing environment is expected to be volatile.
In addition, the non-residential construction market – Reliance Steel’s largest end market – continues to be the weakest link. While there have been some recovery of late, demand remains significantly below the peak levels achieved in 2006.
Key Picks from the Sector
Other metals companies having favorable Zacks Rank are CIRCOR International, Inc. (CIR), Norsk Hydro ASA (NHYDY) and Worthington Industries, Inc. (WOR). All of them hold a Zacks Rank #2 (Buy).