As reported by Reuters, ratings agency Standard & Poor’s recently raised the ratings of Reliance Steel & Aluminum Co. (RS), including its senior unsecured debt and corporate credit ratings, to 'BBB' from 'BBB-.’ S&P also maintained a ‘Stable’ outlook for the company’s ratings.
The positive ratings action was based on the size and diversification of the company’s distribution business, which has consistently maintained its margins and improved credit metrics over time. S&P expects this performance to continue in the long term and hence raised the ratings.
The rating upgrade also reflects the demand for Reliance Steel’s products in its important end markets and its ability to maintain steady revenue and EBITDA growth over the past few years even amid a sluggish economic recovery.
Moreover, S&P cited that inorganic growth strategy and improvement in energy and aerospace end markets could help the company mitigate soft demand from non-residential construction markets.
The ratings agency also believes that Reliance’s revenues will grow in the high single-digits this year. Moreover, increased demand is expected to result in a 10% rise in sales volume this year and help offset the negative impact of declining steel prices.
S&P rated the company’s liquidity position as “strong.” Reliance had total liquidity of $705 million, as of June 30, 2012. Moreover, the ratings agency believes that Reliance’s internally generated cash flow of $450-$500 million would suffice its working capital requirements.
In addition, Reliance is well placed to manage its overall debt maturities. The company will likely repay the forthcoming maturity of $75 million of unsecured private placement notes with cash next year. Also, Reliance has complied with the covenants attached to its revolving credit facility quite successfully and would probably sustain the trend over the next two years.
However, S&P said that any near-term ratings upgrade is unlikely owing to Reliance’s inorganic growth strategy and a sluggish nonresidential construction market. Moreover, the ratings might be downgraded in case Reliance takes on excessive debt for financing its acquisitions or returning cash to shareholders. Also, a further decline in steel prices, which would hurt margins, or a deceleration in demand from Reliance’s end markets might result in a downgrade.
We currently have a long-term Outperform recommendation on Reliance Steel. The company, which competes with Metals USA Holdings Corp. (MUSA) and Worthington Industries Inc. (WOR), maintains a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating.Read the Full Research Report on RS
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