On Nov 18, we reaffirmed our Neutral recommendation on metals processor Reliance Steel & Aluminum Co. (RS). While strength across automotive and aerospace markets should support the company’s results, we maintain a cautious stance considering the weak pricing environment and a still soft non-residential construction market.
Earnings for third-quarter 2013, reported on Oct 24, beat the Zacks Consensus Estimate, but sales missed. Lower metal prices coupled with higher costs led to a decline in profit. Reliance Steel expects economic challenges to continue into the fourth quarter. Lower shipping days due to the holiday season is expected to hurt sales volume in the final quarter.
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 well placed to leverage the strong momentum across a number of end 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.
In addition, Reliance Steel remains committed to offer incremental returns to its shareholders. The company raised its quarterly dividend by 10% to 33 cents per share in Jul 2013.
However, Reliance Steel remains challenged by weak steel industry fundamentals. The steel industry remains affected by overcapacity that continues to outpace demand. There is not enough demand for steel products due to weakness in construction end markets, resulting in excess supply.
Reliance Steel also contends with soft steel and metals pricing environment. Prices for stainless and aluminum products are expected remain weak in the near term.
Moreover, 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.
Other Stocks to Consider
Other metals companies having favorable Zacks Rank are Mitsui & Co. Ltd. (MITSY), NSK Ltd. (NPSKY) and CIRCOR International, Inc. (CIR). All of them hold a Zacks Rank #1 (Strong Buy).