Reliance Steel: Updated Research Report - Analyst Blog

On May 19, we issued an updated research report on Reliance Steel & Aluminum Co. RS. While the metal processor is poised to gain from strong momentum across a number of end-use markets, it remains exposed to a weak pricing environment and a still soft non-residential construction market.
 
Reliance Steel's adjusted earnings for the first quarter of 2014, reported on Apr 24, missed the Zacks Consensus Estimate. However, revenues jumped on higher demand and contributions from acquisitions, and beat expectations. The company expects the pricing and demand environment to improve in the second quarter.

Reliance Steel, a Zacks Rank #3 (Hold) stock, has tremendous earnings capacity with its broad and diversified product base, along with a wide geographic footprint that positions it well in the industry. It continues to evaluate and execute additional growth projects and is well placed to leverage strength across a number of markets, including automotive and aerospace.
 
Reliance Steel continues its aggressive acquisition strategy to boost growth. The acquisition of steel and aluminum components maker Metals USA is a strategic fit with the company's portfolio and complements its existing customer base, product mix and geographic footprint. The company is also focused on growing its business organically.
 
Reliance Steel also remains committed to offer incremental returns to its shareholders. The company, in Feb 2014, raised its quarterly dividend by 6% to 35 cents per share.
 
However, Reliance Steel still contends with a soft steel and metals pricing environment. Average selling prices fell roughly 9% year over year in the first quarter. The overall pricing environment is expected remain volatile.

In addition, the non-residential construction market – Reliance Steel's largest end-market – continues to be a weak link. While there has been some recovery of late, demand remains significantly below the peak levels achieved in 2006.

Reliance Steel also remains challenged by weak steel industry fundamentals. The U.S. steel industry has been hobbled by increased imports of cheaper steel products. The industry remains affected by overcapacity that continues to outpace demand.

Other Stocks to Consider

Other metals companies having favorable Zacks Rank are NN Inc. NNBR, Mitsui & Co. Ltd. (MITSY) and Norsk Hydro ASA (NHYDY). While NN carries a Zacks Rank #1 (Strong Buy), both Mitsui and Norsk Hydro hold a Zacks Rank #2 (Buy).

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