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Here's Why You Should Hold Onto Reliance Steel (RS) Stock Now

Anindya Barman

Reliance Steel & Aluminum Co. RS is gaining from its broad and diversified product base, wide geographic footprint, continued demand strength across aerospace and automotive end-markets and synergies of acquisitions.

Shares of the metals service center company, which currently carries a Zacks Rank #3 (Hold), have lost 21.2% over the past year, outperforming the 38.5% decline of its industry.


 

Reliance Steel is seeing strong demand across aerospace and automotive markets. Demand in the aerospace market has been driven by higher commercial aerospace build rates and activities by defense customers. Strong demand is also witnessed in the automotive market, backed by increased use of aluminum in the industry.

Reliance Steel, during its third-quarter call, said that it is optimistic about business conditions for the fourth quarter. The company also sees healthy demand in the fourth quarter.

Reliance Steel is also benefiting from a favorable metal pricing environment. Its average selling prices for stainless steel products increased in the third quarter, driven by the price hikes announced by the mills related to Section 232 trade actions on imported steel and higher input costs. The Trump administration’s Section 232 actions have provided much-needed protection to the American steel producers. The tariffs are leading to lower imports into the United States and have provided a boost to U.S. steel prices.

The company’s average selling prices increased 23% year over year in the third quarter, driving revenues and margins. The company expects pricing fundamentals will remain steady-to-slightly up in the fourth quarter based on current demand levels, ongoing trade actions and raw material costs. Reliance Steel expects average selling price per ton to be flat-to-up 1% in the fourth quarter compared with the third-quarter tally.

Reliance Steel also continues with its aggressive acquisition strategy to tap growth opportunities. With the takeover of Metals USA, the company has added about 48 service centers throughout the United States. The buyout of Tubular Steel also boosts the company's long-term growth strategy and strength by expanding its product portfolio and end market diversification. Moreover, the acquisition of Best Manufacturing Inc. highly complements the company's service center network with specialty high-margin products, strong focus on customer service and value-added processing capabilities.

Reliance Steel, in November 2018, also completed the purchase of all of the membership interests of All Metals Holding, LLC, including its operating subsidiaries, All Metals Processing & Logistics, Inc. (“AMPL”) and All Metals Transportation and Logistics, Inc. (“AMTL”).

Per Reliance Steel, the buyout complements its growth strategy and meets its criteria of buying high quality businesses that are immediately accretive to its earnings. All Metals’ focus on high return, toll processing and logistics services further bolsters Reliance Steel’s solid position in these areas. The buyout marked Reliance Steel’s third acquisition of 2018.

However, Reliance Steel faces some volume pressure in fourth-quarter 2018. The company’s shipments in the quarter are expected to be affected by fewer shipping days and a decline in shipping volumes due to holiday-related shutdowns. The company expects tons sold to decline 5% to 7% in the fourth quarter on a sequential comparison basis.

Reliance Steel & Aluminum Co. Price and Consensus

 

Reliance Steel & Aluminum Co. Price and Consensus | Reliance Steel & Aluminum Co. Quote

Stocks to Consider

A few better-ranked stocks worth considering in the basic materials space include Quaker Chemical Corporation KWR, Israel Chemicals Ltd. ICL and Cameco Corporation CCJ.

Quaker Chemical has an expected earnings growth rate of 21.1% for the current year and carries a Zacks Rank #1 (Strong Buy). Its shares have gained 13% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.

Israel Chemicals has an expected earnings growth rate of 2.7% for the current year and carries a Zacks Rank #2 (Buy). The company’s shares have rallied 37% over the past year.

Cameco has an expected earnings growth rate of 20% for the current year and carries a Zacks Rank #2. The company’s shares have gained 15% in the past year.
 
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