Can Reliance Steel (RS) Maintain Its Earnings Streak In Q2?

Reliance Steel & Aluminum Co. (NYSE:RS) is set to release its second-quarter 2016 results before the opening bell on Jul 21.

In the last quarter, the company had delivered a positive earnings surprise of 17.05%. The company gained from improved operational performance and strong customer demand across most of its end markets. However, reduced sales volumes and lower metal prices weighed on its revenues in the quarter.

Reliance Steel has beaten earnings estimates in the trailing four quarters with an average beat of 10.95%.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Reliance Steel, in its first-quarter 2016 call, said that it expects overall sales volumes to remain flat or increase up to 2% sequentially in the second quarter due to the slow growth of the U.S. economy. Underlying demand is also expected to increase modestly in the second quarter compared to the first. The company expects adjusted earnings for the second quarter in the band of $1.15 to $1.25 per share.

Reliance Steel should benefit from improved pricing environment in the second quarter. The company is optimistic about metal pricing in the second quarter due to recent mill price rises. It sees average selling price in the June quarter to be up around 3% to 5% sequentially.

Moreover, steel market conditions in the U.S. have improved of late, thanks to favorable rulings (leading to levy of tariffs on imports) on steel trade cases in the recent past. These punitive actions have led to a reduction in steel imports.

Reliance Steel should also continue to benefit from its strategic acquisitions and strength across aerospace and automotive markets in the June quarter. Demand in the aerospace market is being supported by higher commercial aerospace build rates. The automotive market is witnessing strong demand, backed by the company’s toll processing businesses in the U.S. and Mexico as well as increased use of aluminum in the industry. Reliance Steel expects sustained momentum across these markets in 2016.

Synergies from acquisitions should also support Reliance Steel’s results in the second quarter. Reliance Steel continues with its aggressive acquisition strategy to drive growth.

Earnings Whispers

Our proven model shows that Reliance Steel has the right combination of two key ingredients to beat earnings.

Positive Zacks ESP: The Earnings ESP (Expected Surprise Prediction) for Reliance Steel is +3.05% - the difference between the Most Accurate Estimate of $1.35 and the Zacks Consensus Estimate of $1.31. This indicates a likely positive earnings surprise.

Zacks Rank #2 (Buy): Reliance Steel’s Zacks Rank #2 increases the predictive power of its ESP.

Note that stocks with Zacks Rank of #1, 2 and 3 have a significantly higher chance of beating earnings. The Sell rated stocks (#4 and 5) should never be considered going into an earnings announcement.

Stocks Warranting a Look

Here are some companies in the steel space that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

AK Steel Holding Corp. (NYSE:AKS) has an Earnings ESP of +33.33% and a Zacks Rank #2.

Ryerson Holding Corp. (NYSE:RYI) has an Earnings ESP of +7.69% and a Zacks Rank #2.

Steel Dynamics Inc. (NASDAQ:STLD) has an Earnings ESP of +1.79% and a Zacks Rank #2.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>