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Must-know: Reliance Steel & Aluminum’s diversified business

Mohit Oberoi

Must-know: An overview of Reliance Steel & Aluminum (Part 2 of 9)

(Continued from Part 1)

Why diversification is a key driver for any business

Before we look at the diversification of Reliance Steel & Aluminum’s (RS) operations, let’s understand the importance of diversification for any business. By having operations spread across multiple markets and customers, a company limits the impact of any negative event associated with one customer or market. This helps to reduce volatility and to generate stable profits for the business.

The diversified operations of Reliance Steel & Aluminum

We will look at two components of diversification for Reliance Steel— geographical diversification and, more importantly, customer diversification.

Geographical diversification

The chart above shows the geographical operations of Reliance Steel. As you can see, the operations are well diversified across the U.S. The company also gets a portion of its revenues from international markets.

Customer Diversification

Reliance Steel has excellent customer diversification, which only a few of its competitors can match. The chart above shows the company’s diversified customer base.

In 2012, Reliance Steel handled approximately 20,500 transactions per business day, averaging approximately $1,640 per transaction. It has over 125,000 customers, with no single customer accounting for more than 1.1% of its sales. This diversification has helped Reliance Steel with stable margins across business cycles.

We will analyze the margins for Reliance Steel in the next parts of this series.

An investor’s guide to key capabilities of Reliance Steel

Reliance Steel & Aluminum provides services like slitting, cutting, sawing, and leveling. It has over 100,000 products. The company has a just-in-time inventory concept, which helps it to be nimble in its operations. It is able to deliver around 40% of its orders within 24 hours of receiving the orders. This helps to reduce inventory costs and the overall manufacturing costs for the company.

Please note that  ArcelorMittal (MT), United States Steel Corporation (X), and Nucor Corporation (NUE) are other steel companies operating in the U.S. The industry can also be accessed through the SPDR S&P Metals and Mining ETF (XME).

Continue to Part 3

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