Reliance Steel's (RS) Q2 Earnings & Revs Trail Estimates - Analyst Blog

Reliance Steel (RS) saw higher profit in the second quarter of 2014 on increased sales but its earnings missed expectations. Profit, as reported, moved up roughly 19% year over year to $96.5 million or $1.22 per share in the quarter from $81 million or $1.05 per share a year ago.
 
Barring one-time items including costs related to sale of non-core assets, earnings were $1.30 per share, a 14% rise from $1.14 recorded a year ago. However, it missed the Zacks Consensus Estimate of $1.39. Adjusted earnings were at the bottom end of the company's expectations, impacted by lower-than-expected volume improvements.
 
Reliance Steel saw its consolidated costs rise around 6% 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 fell as much as 5.3% in the trading session following the announcement, reflecting the miss.
 

Revenues, Volume and Pricing
 
Revenues rose 6.9% year over year to $2,616.8 million in the reported quarter, but missed the Zacks Consensus Estimate of $2,667 million. Metals USA acquisition contributed to the top line growth.
 
Overall sales volume rose 8.2% year over year in the quarter while same-store sales volumes moved up 4.6%. Average prices per ton fell 0.9% year over year.
 
Financials
 
Reliance Steel ended the quarter with cash and cash equivalents of $113.5 million, up roughly 13% year over year. Total debt declined roughly 9% year over year to around $2.1 billion. Net debt-to-capital ratio was 33.3% at the end of the reported quarter, down from 37.6% a year ago. The company generated operating cash flows of $40.7 million in the reported quarter.

Outlook
 
Looking ahead, Reliance Steel expects the demand environment to improve in the third quarter at a modestly higher rate than the second amid a slow but steady recovery in the U.S. economy. The company sees pricing to remain essentially stable with current levels. It expects earnings per share for the third quarter to be in the range of $1.25 to $1.35. The current corresponding Zacks Consensus Estimate for the quarter is $1.31.

While pricing is expected to remains under pressure, Reliance Steel sees continued strength in the aerospace market and expects further demand improvement in second-half 2014. For automotive, the company expects strong production rates in the second half and in 2015. Higher use of aluminum in the automotive industry represents a positive for the company.  
 
Energy demand has been forecast to be better in the second half and the next year while a modest improvement is expected in heavy industry. For non-residential construction, demand is improving but remains way below its peak levels and the company cautiously expects further improvement in the second half and in 2015.
 
Reliance Steel, a Zacks Rank #2 (Buy) stock, 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. But it remains challenged by weak steel industry fundamentals and contends with soft steel and metals pricing environment.
 
Other metals companies having favorable Zacks Rank are NN Inc. (NNBR), NSK Ltd. (NPSKY) and Precision Castparts Corp. (PCP). While NN and NSK hold a Zacks Rank #1 (Strong Buy), Precision Castparts retains a Zacks Rank #2 (Buy).