Reliance Steel's Strategic Acquisitions Should Bear Fruit - Analyst Blog

On Aug 18, we issued an updated research report on Reliance Steel & Aluminum Co. (RS). While the metal processor should benefit from its strategic acquisitions and strength across a number of end-use markets, it remains exposed to a still weak non-residential construction market and a volatile pricing environment.
 
Reliance Steel's adjusted earnings for second-quarter 2014, reported on Jul 24, missed the Zacks Consensus Estimate. Revenues rose on contributions from acquisitions, but trailed expectations. The company expects the demand environment to improve in the third quarter at a slightly higher rate than the second.

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.

Reliance Steel continues its aggressive acquisition strategy to boost growth. The acquisition of steel and aluminum components maker Metals USA is a strategic fit for the company's portfolio and complements its existing customer base, product mix and geographic footprint.

Moreover, Reliance Steel is seeing strong momentum across aerospace and automotive markets. Demand in the aerospace market in 2014 is expected to be supported by higher commercial aerospace build rates. The recent acquisition of Aluminium Services UK Limited will enable the company to expand its presence in this market.

Reliance Steel is expected to make capital spending of $220 million this year. Majority of the expenditure has been focused on expanding its facilities and improving its geographical footprint.

However, Reliance Steel still contends with a soft steel and metals pricing environment. The overall pricing environment is expected remain volatile in the near term.

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

Moreover, the non-residential construction market – Reliance Steel's biggest 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.

Other Stocks to Consider

Other metals companies having favorable Zacks Rank are NN Inc. (NNBR), Century Aluminum Co. (CENX) and Norsk Hydro ASA (NHYDY). While NN and Century Aluminum carry a Zacks Rank #1 (Strong Buy), Norsk Hydro holds a Zacks Rank #2 (Buy).