Why You Should Retain Reliance Steel (RS) In Your Portfolio
Zacks Investment Research | Jan 22, 2020 06:15AM ET
Reliance Steel & Aluminum Co. (NYSE:RS) is benefiting from continued demand strength across key end-use markets, focus on high-margin products and strategic acquisitions.
Shares of the metals service center company have shot up 51.3% over a year, compared with the 52.3% rise of its industry .
Let’s delve deeper to find out why this Zacks Rank #3 (Hold) stock is worth retaining at the moment.
What’s Aiding the Stock?
Reliance Steel is seeing strong demand in major end-use markets such as aerospace and automotive. The company is witnessing healthy demand for heat-treated aluminum products in the aerospace markets. It remains committed to boosting its market share in aerospace.
Moreover, increased use of aluminum in vehicles is driving strong demand for the company’s processing services in the automotive market. Reliance Steel remains committed to investing in facilities and value-added processing equipment to address the rising demand for the services it offers. Healthy demand in the non-residential construction end market also provides additional upside.
In its third-quarter earnings call, Reliance Steel noted that it is optimistic about business prospects for the fourth quarter. Excluding the impact of normal seasonal patterns, it expects end demand to stay relatively steady in the fourth quarter compared with the third quarter.
Reliance Steel also continues with its aggressive acquisition strategy. Notably, the acquisition of All Metals Holding complements its growth strategy and meets its requirements of buying high-quality businesses, which are immediately accretive to its earnings. All Metals bolsters Reliance Steel’s toll processing and logistics services businesses.
Reliance Steel also recently announced that it purchased all of the outstanding capital stock of Fry Steel Company. The acquisition is in sync with its business model and strategy of investing in high quality and high margin businesses. This move also supports the company’s customer base and product diversification strategy.
A Few Downsides
Reliance Steel is exposed to some pressure on metal pricing. It is seeing pricing pressure for certain carbon steel products, as witnessed in the third quarter. Average prices per ton sold fell 8.4% year over year in the quarter. Reliance Steel expects overall metals pricing to remain near current levels, which is likely to result in its average selling price per ton sold to decline 2% to 3% sequentially in the fourth quarter. As such, lower prices may affect Reliance Steel’s margins in the quarter.
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The company is also seeing pressure on its sales volumes. Its overall sales volume fell 1.8% year over year to 1.48 million tons in the third quarter due to lower shipments. Volume pressure will likely continue in the fourth quarter as indicated by the company’s guidance. Reliance Steel projects total tons sold to be sequentially down 4% to 7% in the fourth quarter. Customer holiday-related closures and fewer shipping days are expected to lead to lower shipping volumes for the quarter.
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