We are retaining our Neutral recommendation on Reliance Steel & Aluminum Co. (RS) following its mixed third quarter results. Earnings of $1.30 per share outstripped the Zacks Consensus Estimate by a dime. Revenues, however, fell roughly 4% year over year to $2,055.3 million on lower pricing and missed the Zacks Consensus Estimate of $2,099 million.
Healthy performance across energy, aerospace, farm and heavy equipment, and automotive was somewhat masked by sustained weakness in the non-residential construction market. The company witnessed solid demand across the energy and automotive markets in the quarter.
Moving ahead, the company envisions economic challenges to sustain in the fourth quarter and expects fewer shipping days due to the holidays to result in a sequential decline in sales volume.
Reliance Steel 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.
In addition, Reliance Steel remains committed to offering incremental returns to its shareholders. Its expansion initiatives and strategic acquisitions should drive growth this year and beyond.
However, Reliance Steel contends with falling steel and metals prices. The company is seeing a declining pricing trend for most of the metals it sells. Prices for alloy aluminum, stainless steel and carbon steel products fell in the third quarter. While stainless and aluminum prices have been forecast to rise modestly in the fourth quarter, carbon steel pricing is expected to remain weak.
We also remain concerned about the non-residential construction market (the company’s largest end market), which continues to be the weakest link. In addition, raw material prices are expected to remain volatile. All these factors lead us to tread with caution.
Reliance Steel, which competes with Metals USA Holdings Corp. (MUSA) and Worthington Industries Inc. (WOR), retains a short-term Zacks #3 Rank (Hold).
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