Reliance Steel's Q1 Earnings Miss, Shares Slip - Analyst Blog

Reliance Steel RS saw higher profit in the first quarter of 2014 as its sales rose by double digits on improved demand. Profit, as reported, moved up roughly 4% year over year to $87.2 million or $1.11 per share in the quarter from $83.7 million or $1.09 per share a year ago.

 

Barring one-time items including litigation costs, earnings were $1.19 per share, missing the Zacks Consensus Estimate by a nickel. Adjusted earnings were also below the company's expectations, impacted by lower metals pricing and higher tax rate.

 

Reliance Steel saw its consolidated costs jump around 27% year over year in the reported quarter. It recorded an inventory adjustment related charge of $5 million (included in cost of sales) in the quarter.

 

The California-based metals processor's shares were down as much as 3.5% in the trading session following the announcement. The stock is down around 7% so far this year. 

 

Revenues, Volume and Pricing

 

Revenues climbed roughly 26% year over year to $2,553 million in the reported quarter, coming ahead of the Zacks Consensus Estimate of $2,515 million. Higher demand coupled with acquisitions, including Metals USA, supported the top line. 

 

Overall sales volume surged around 39% year over year in the quarter while same-store sales volumes moved up roughly 8%. Average prices per ton, however, fell around roughly 9% year over year.

 

Financials

 

Reliance Steel ended the quarter with cash and cash equivalents of $113.6 million, up 13% year over year. Total debt increased roughly 85% year over year to around $2.1 billion. Net debt-to-capital ratio was 33.8% as at the end of the reported quarter, up from 22.4% a year ago.

 

Reliance Steel's Board, in Feb 2014, raised in its quarterly dividend by 6% to 35 cents per share. The company generated operating cash flows of $68.8 million in the reported quarter, down roughly 5% year over year.

 

Outlook

 

Moving ahead, Reliance Steel expects metals pricing and demand environment to improve in second-quarter 2014 amid a slow but steady recovery in the U.S. economy. The company sees increased sales volume and slightly higher pricing in the quarter. It expects earnings per share for the quarter to be in the range of $1.30 to $1.40. The current Zacks Consensus Estimate for the quarter is $1.38.

 

Reliance Steel sees continued strength in the automotive market and expects healthy operating results across end-markets such as aerospace, energy, semiconductor/electronics and manufactured goods in 2014.

 

While pricing is expected to remain under pressure, the company expects aerospace demand to improve in 2014. Energy demand and pricing have been forecast to be better this year while a modest improvement is expected in heavy industry. Reliance Steel also sees a modest recovery in non-residential construction market in 2014.

 

Reliance Steel, a Zacks Rank #4 (Sell) stock, remains challenged by weak steel industry fundamentals and contends with soft steel and metals pricing environment. Moreover, non-residential construction, its largest end market, still remains weak.

 

Nevertheless, Reliance Steel is well placed to leverage the strong momentum across a number of end markets, including automotive and aerospace. Strategic acquisitions and expansion of existing operations should also aid to its results moving ahead.

 

Other metals companies having favorable Zacks Rank are NN Inc. NNBR, NSK Ltd. (NPSKY) and Precision Castparts Corp. PCP. While NN holds a Zacks Rank #1 (Strong Buy), both NSK and Precision Castparts retain a Zacks Rank #2 (Buy).