Here's Why Reliance Steel (RS) Should Be In Your Portfolio

Reliance Steel & Aluminum Co.'s (NYSE:RS) stock looks promising at the moment. The company, sporting a Zacks Rank #1 (Strong Buy), is gaining from its broad and diversified product base, wide geographic footprint, focus on high-margin products, continued demand strength across aerospace and automotive end-markets and strategic acquisitions.

We are positive on the company’s prospects and believe that the time is right for you to add the stock to portfolio as it looks promising and is poised to carry the momentum ahead.

Let's see what makes this metals service center company an attractive investment option at the moment.

Price Performance

Reliance Steel has outperformed the industry it belongs to year to date. The company’s shares have gained 24.2% compared with roughly 14.2% rise recorded by the industry.

Estimates Going Up

Earnings estimate revisions have the greatest impact on stock prices. Estimates for 2019 for Reliance Steel have moved up over the past two months. Over this period, the Zacks Consensus Estimate for the year has shot up around 11.5%. The Zacks Consensus Estimate for 2020 has also increased roughly 10.7% over the same timeframe.

Superior Return on Equity (ROE)

ROE is a measure of a company’s efficiency in utilizing shareholder’s funds. ROE for the trailing 12-months for Reliance Steel is 13.3%, above the industry’s level of 10%.

Cash Deployment

Reliance Steel remains focused on returning value to its shareholders. The company paid $145.3 million in dividends to its shareholders in 2018. It also repurchased 6.1 million shares worth record $484.9 million in 2018. At the end of 2018, it had roughly 7.03 million shares available for repurchase under its share repurchase program.

Reliance Steel, last month, also raised its quarterly dividend by 10% to 55 cents per share. The company has paid regular quarterly dividends for 59 straight years.

Strong End-Market Demand, Favorable Pricing

Reliance Steel is seeing strong demand across aerospace and automotive markets. Demand in the aerospace market has been driven by higher commercial aerospace build rates. The company is witnessing strong demand for its heat-treated aluminum products. It remains committed to boost its market share in aerospace.

Strong demand is also witnessed in the automotive market, backed by increased use of aluminum in the industry. The company remains committed to invest in facilities and value-added processing equipment to address the rising demand for the services it offers.

Reliance Steel, in its fourth-quarter call, said that it is optimistic about business conditions for the first quarter of 2019. It expects demand to be healthy in the first quarter and projects tons sold to be up 6-8% sequentially in the quarter.

Reliance Steel is also expected to benefit from a favorable metal pricing environment. The company’s average selling prices increased 20% year over year in fourth-quarter 2018. Section 232 trade actions on imported steel coupled with strong demand led to higher metal pricing in the quarter. Higher metal pricing also largely helped the company to generate strong gross profit margin in 2018.

The company expects price hikes for many of its products based on current demand levels, impact of ongoing trade actions and raw material costs.

Synergies of Acquisitions

Reliance Steel continues with its aggressive acquisition strategy to tap growth opportunities. With the takeover of Metals USA, the company has added about 48 service centers throughout the United States. The buyout of Tubular Steel also boosts the company's long-term growth strategy and strength by expanding its product portfolio and end market diversification. Moreover, the acquisition of Best Manufacturing Inc. highly complements the company's service center network with specialty high-margin products, strong focus on customer service and value-added processing capabilities.

Moreover, the purchase of All Metals Holding complements Reliance Steel’s growth strategy and meets its criteria of buying high quality businesses that are immediately accretive to its earnings. All Metals’ focus on high return, toll processing and logistics services further bolsters Reliance Steel’s solid position in these areas.

Other Stocks to Consider

Other top-ranked stocks worth considering in the basic materials space include Kirkland Lake Gold Ltd. (TO:KL) , Israel Chemicals Ltd. (NYSE:ICL) and W. R. Grace & Co. (NYSE:GRA) . You can see the complete list of today’s Zacks #1 Rank stocks here.

Kirkland Lake Gold has an expected earnings growth rate of 47.1% for the current year and carries a Zacks Rank #1. Its shares have shot up around 120% in the past year.

Israel Chemicals has an expected earnings growth rate of 10.8% for the current year and carries a Zacks Rank #2 (Buy). The company’s shares have gained around 23% over the past year.

W. R. Grace has an expected earnings growth rate of 10.4% for the current year and carries a Zacks Rank #2. Its shares have gained roughly 26% in the past year.

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