Reliance Steel Misses, Profit Slips

Zacks

Reliance Steel & Aluminum Co.’s (RS) first-quarter 2013 earnings per share of $1.09 lagged the Zacks Consensus Estimate of $1.15 and was below the year-ago earnings of $1.54 per share. 

 
Profit slid 28% year over year to $83.7 million, hurt by a double-digits fall in sales. Lower pricing also weighed on the results. Reliance Steel recorded an inventory adjustment related credit of $5 million (included in cost of sales) in the reported quarter.
 
Revenues, Volume and Pricing
 
Revenues dipped 11.5% year over year to $2,025.3 million in the reported quarter, just missing the Zacks Consensus Estimate of $2,013 million. Weak demand stemming from economic uncertainty and a year over year decline in average selling price dented the top line. Strength across automotive, energy and heavy equipment was partly masked by lingering weakness in the non-residential construction market. 
 
Sales volume dipped 5.8% year over year but were up 9% sequentially. Average prices per ton were down 6.5% year over year and 1.3% sequentially.
 
Financial Health
 
Reliance Steel exited the quarter with cash and cash equivalents of $100.1 million, up 43% year over year. Total debt was $1.15 billion at the end of the quarter, down 20% from a year ago. Net debt-to-capital ratio was 22.4% as of Mar 31, 2013, down from 29% as of Mar 31, 2012. 
 
Recent Acquisitions
 
Reliance Steel continues its aggressive acquisition strategy to incite growth. It recently wrapped up its acquisition of Metals USA Holdings Corp, following the approval of the transaction by Metals USA’s shareholders. Metals USA, which makes steel and aluminum components, is a strategic fit with Reliance Steel’s portfolio and complements its existing customer base, product mix and geographic footprint.
 
Reliance Steel financed the buyout with the proceeds from the recently amended $1.5 billion unsecured revolving credit facility, a new term loan worth $500 million and the recent $500 million senior notes offering.
 
Outlook
 
Moving ahead, Reliance Steel expects the uncertain economic environment to continue to affect the steel industry in second-quarter 2013. The company envisions a modest recovery in demand while sees weak pricing environment to continue. Factoring in the contributions of Metals USA acquisition, Reliance Steel expects to earn $1.10 to $1.20 per share in the second quarter.
 
Our View
 
Reliance Steel has a 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 well placed to leverage the strong momentum across a number of end markets.
 
However, Reliance Steel contends with weak steel and metals pricing environment. Moreover, the non-residential construction market (the company’s largest end market) continues to be the weakest link.
 
Reliance Steel currently retains a Zacks Rank #2 (Buy).
 
Other companies in the metals industry having favorable a Zacks Rank are NSK Ltd. (NPSKY), Worthington Industries Inc. (WOR) and Precision Castparts Corp. (PCP). While NSK holds a Zacks Rank #1 (Strong Buy), both Worthington and Precision Castparts retain a Zacks Rank #2 (Buy).
Read the Full Research Report on PCP

Read the Full Research Report on RS

Read the Full Research Report on WOR

Read the Full Research Report on NPSKY

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