Reliance Steel to Gain from Strong Demand and Acquisitions

We issued an updated research report on Reliance Steel & Aluminum Co RS on Jan 25.

Reliance Steel is gaining from its broad and diversified product base, wide geographic footprint and continued demand strength across aerospace and automotive markets and synergies of acquisitions.

Reliance Steelcontinues with its aggressive acquisition strategy to tap growth opportunities. The addition of Metals USA to the company’s portfolio has complemented its existing customer base, product mix and geographic footprint.

The buyout of Tubular Steel also provides impetus to 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. bodes well for the company's existing service center network with its specialty high margin products, value-added processing capabilities and strong focus on customer service.

Reliance Steel also acquired all the common stock of Ferguson Perforating Company through its fully-owned subsidiary, Diamond Manufacturing Company. Ferguson’s high value-added processing capabilities align well with the company’s inorganic growth strategy and also extend its product portfolio.

Reliance Steel is alsowitnessing strong demand across aerospace and automotive markets. Demand in the aerospace market has been supported by higher commercial aerospace build rates. Strong demand is also witnessed in the automotive market, backed by the company’s toll processing businesses in the United States and Mexico as well as increased use of aluminum in the industry. Reliance Steel expects sustained momentum across these markets.

However, Reliance Steel is exposed to pricing and volume pressure in the fourth quarter. The company, in its third-quarter call, noted that it expects tons sold will be down 4-6% in the fourth quarter on a sequential basis. Average selling prices are also projected to be flat to down 2% in the fourth quarter compared with the third.

Reliance Steel has outperformed the industry it belongs to over the last three months. The company’s shares have moved up 16% over this period, compared with roughly 10% gain recorded by its industry.

Zacks Rank & Key Picks

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

Some better-ranked stocks in the basic materials space areMethanex Corporation MEOH, BASF SE BASFY and Kronos Worldwide Inc. KRO.

Methanex has an expected long-term earnings growth of 15% and sports a Zacks Rank #1 (Strong Buy). Shares of the company have rallied 31.5% over a year.You can see the complete list of today’s Zacks #1 Rank stocks here.

BASF has an expected long-term earnings growth of 8.7% and flaunts a Zacks Rank #1. Shares of the company have moved up 23.5% in a year’s time.

Kronos has an expected long-term earnings growth of 5% and carries a Zacks Rank #2 (Buy). Its shares have surged 127.2% over a year.

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