Reliance Steel’s Q3 Earnings Lag Estimates, Sales Beat

Reliance Steel (RS) posted earnings (as reported) of $1.21 per share in the third quarter of 2014, down from $1.22 per share logged a year ago. Profit inched up 0.4% year over year to $95.5 million from $95.1 million a year ago.

Barring one-time items, including costs related to settlement of antitrust litigation matters, earnings were $1.33 per share, a roughly 8% rise from $1.23 recorded a year ago. However, it trailed the Zacks Consensus Estimate of $1.36. Adjusted earnings were near the top end of the company’s expectations.

Reliance Steel saw its consolidated costs rise around 12% year over year in the reported quarter. It recorded an inventory adjustment related charge of $20 million (included in cost of sales) in the quarter.

The California-based metals processor’s shares fell as much as 2.4% in the trading session last Thursday before recovering to close the day at $63.54. The stock is down roughly 13% so far this year.

Revenues, Volume and Pricing

Revenues rose 10.7% year over year to $2,705.1 million in the reported quarter as volumes rose on improved customer demand. Higher pricing and Metals USA acquisition also contributed to the gain. Sales beat the Zacks Consensus Estimate of $2,695 million.

Overall sales volume rose 6.4% year over year in the quarter while same-store sales volumes moved up 6.6%. Gains were witnessed across all commodities on a year over year basis. Average prices per ton went up 4.3% year over year.

Financials

Reliance Steel exited the quarter with cash and cash equivalents of $100.7 million, down roughly 4% year over year. Total debt increased roughly 8% year over year to around $2.3 billion. Net debt-to-capital ratio was 35.1% at the end of the reported quarter, up from 34.9% a year ago. The company generated operating cash flows of $53.3 million in the quarter.

Outlook

Moving ahead, Reliance Steel sees a slow but steady recovery in the U.S. economy and expects sales volumes to decline sequentially in the fourth quarter resulting from lesser shipping days due to the holiday season and closures at many of its customers’ facilities. The company expects pricing to fall in the quarter due to softness in many carbon steel products and lower nickel prices. It expects earnings per share for the fourth quarter to be in the range of $1.00 to $1.10.

Reliance Steel sees continued strength in the aerospace market and expects further demand improvement through the rest of 2014. For automotive, the company expects strong production rates in the fourth quarter and in 2015. Higher use of aluminum in the automotive industry represents a positive for the company.

Energy demand has been forecast to continue to improve in the fourth quarter and the next year. For non-residential construction, demand continues to improve but remains way below its peak levels and the company cautiously expects further improvement in 2015.

Reliance Steel, a Zacks Rank #3 (Hold) 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.

Other steel and metals companies having favorable Zacks Rank are Steel Dynamics Inc. (STLD), United States Steel Corp. (X) and Nucor Corporation (NUE) with all retaining a Zacks Rank #2 (Buy).