Reliance Steel (RS) Poised On Acquisitions, Headwinds Remain

On Aug 19, we issued an updated research report on Reliance Steel & Aluminum Co. (NYSE:RS) .

Reliance Steel saw its profits improve around 12% in second-quarter 2016 and its earnings topped expectations. The bottom line gained from efficient inventory management and better mill prices in the quarter. Revenues, however, fell around 9% year over year and trailed expectations. Sales were affected by lower overall pricing.

Reliance Steel, in its second-quarter call, said that it expects overall sales volumes to be down between 1% and 3% sequentially in the third quarter due to seasonality. The company also expects the average selling price to be up in the range of 1% to 3% sequentially in the third quarter.

Reliance Steel continues with its aggressive acquisition strategy to incite growth. The acquisition of Aluminium Services UK Limited has allowed Reliance Steel to expand its presence in the aerospace market. The purchase of Fox Metals and Alloys has also strengthened the company's foothold in the oil and gas space. Further, the buyout of Tubular Steel has enhanced the company’s long-term growth strategy and strength by expanding its product portfolio and end market diversification.

Also, the purchase of steel and aluminum components maker, Metals USA, complements Reliance Steel’s existing customer base, product mix and geographic footprint. The company also recently acquired Alaska Steel Company, a full-line metal distributor.

Reliance Steel is also well placed to leverage the strong momentum across a number of end markets. The company is seeing strong demand for its products across the aerospace and automotive markets. Demand in the aerospace market is being supported by higher commercial aerospace build rates. Aerospace accounted for around 11% of the company’s sales in the second quarter. Strong demand is also witnessed in the automotive market, 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 the balance of 2016.

Moreover, Reliance Steel remains committed to offer incremental returns to its shareholders. The company has sufficient liquidity and cash flows to support dividend payouts and share buybacks moving ahead.

However, the company’s business in the energy markets is expected to remain under pressure in the near term due to depressed oil prices. Reduced drilling activities are hurting demand for the company’s products in the energy space. 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 still remains significantly below the peak levels achieved in 2006.

Moreover, the company still remains exposed to pricing pressure. Despite an improvement in metals prices of late, overall pricing remains below peaks levels as well as the levels seen last year. The company’s average selling prices fell around 10% in the second quarter, hurting its top line.

Reliance Steel is a Zacks Rank #3 (Hold) stock.

Stocks to Consider

Some better-ranked companies in the steel space include ArcelorMittal (NYSE:MT) , Schnitzer Steel Industries Inc. (NASDAQ:SCHN) and Olympic Steel Inc. (NASDAQ:ZEUS) . While both ArcelorMittal and Schnitzer Steel sport a Zacks Rank #1 (Strong Buy), Olympic Steel carries a Zacks Rank #2 (Buy).

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 >>