Reliance Steel Poised on Acquisitions, Improved Pricing

28 March 2017

On Mar 24, we issued an updated research report on Reliance Steel & Aluminum Co. RS.Reliance Steel has outperformed the Zacks categorized Metal-Products Distribution industry over a year as it is gaining from continued strength across aerospace and automotive markets and synergies of acquisitions. The company's shares gained 14.6% over this period while the industry saw a decline of 29.2%.

Reliance Steel’s earnings and sales for the fourth quarter of 2016 beat the respective Zacks Consensus Estimate. The company, in its fourth-quarter call, said that it is optimistic about business activity levels and metal pricing. While Reliance Steel saw lower overall demand for its products in 2016 due to challenging market conditions, it sees improved demand this year.

The company anticipates tons sold to be up 8% to 10% on a sequential comparison basis in the first quarter of 2017, partly due to normal seasonal factors. Moreover, Reliance Steel expects its average selling price to be up 2% to 4% in the first quarter from the fourth quarter of 2016. The company saw a significant improvement in pricing for carbon steel products in the fourth quarter and expects improved demand levels and reduced imports to support metal pricing in the first quarter.

Reliance Steel also continues with its aggressive acquisition strategy to incite growth. The company, in February, said that its acquisition pipeline remains active in 2017.

The addition of Metals USA to Reliance Steel’s portfolio complements its existing customer base, product mix and geographic footprint. With this acquisition, the company expects synergies of $15–$20 million a year.

Moreover, the acquisition of Aluminium Services UK Limited has enabled Reliance Steel to expand its presence in the aerospace market. The purchase of Fox Metals and Alloys has also strengthened the company's foothold in the oil and gas space. Further, the buyout of Tubular Steel has enhanced the company’s long-term growth strategy and strength by expanding its product portfolio and end market diversification.

The acquisition of Best Manufacturing Inc. also highly complements the company's existing service center network with its specialty high margin products, value-added processing capabilities and strong focus on customer service.

Moreover, Reliance Steel is witnessing strong demand for its products across aerospace and automotive markets. Demand in the aerospace market has been supported by higher commercial aerospace build rates. Strong demand is also witnessed in the automotive market, backed by the company’s toll processing businesses in the U.S. and Mexico as well as increased use of aluminum in the industry. Reliance Steel expects sustained momentum across these markets in 2017.

Moreover, Reliance Steel remains committed to offer incremental returns to its shareholders. The company has sufficient liquidity and cash flows to support dividend payouts and share buybacks moving ahead.

However, the company’s business in the energy markets is expected to remain under pressure in the near term due to still depressed oil prices. Low drilling activities are hurting demand for the company’s products in the energy space. While there has been some recovery of late in the non-residential construction market (Reliance Steel’s biggest end-market), demand still remains significantly below the peak levels achieved in 2006. This key end-use market remains on a slow road to recovery.

Stocks to Consider

Better-ranked companies in the steel and metals space include United States Steel Corporation X, Ternium S.A. TX and Angang Steel Company Limited ANGGY, all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

U.S. Steel has an expected long-term growth of 8%.

Ternium has an expected long-term growth of roughly 18.4%.

Angang Steel has an expected earnings growth rate of 45.3% for the current year.

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