We maintain our Outperform recommendation on
Reliance Steel & Aluminum Co.
) which is a leading metals service center for value-added
materials management and metals processing services. During the
third quarter of 2011, Reliance Steel completed the acquisition of
Continental Alloys & Services, Inc. for $415 million.
The company has plenty of capital to grow its existing
operations and fund acquisitions. Reliance Steel continues to
evaluate and execute additional growth projects as appropriate,
given the economic conditions and outlook at the time.
Reliance Steel reported strong net income of $1.13 per share in
the third quarter of 2011 versus $0.65 in the prior-year quarter,
exceeding the Zacks Consensus Estimate of $1.11.
Quarterly sales were $2.14 billion, up 29% year over year. In
the third quarter of 2011, the company sold 1.08 million tons of
metal, up 13% year over year and the average price per ton sold was
up 16% compared with the prior-year quarter. In the quarter, carbon
steel sales were 53% of net sales; aluminum sales were 15%;
stainless steel sales were 15%; alloy sales were 11%; toll
processing sales were 2%; and other sales were 4%.
In August 2011, Reliance Steel acquired Continental Alloys &
Services Inc. ("Continental"), headquartered in Houston, Texas, and
certain affiliate companies. Continental is a leading global
materials management company focused on high-end steel and alloy
pipe, tube and bar products and precision manufacturing of various
tools designed for well completion programs of global energy
service companies. It has 12 locations in the United States,
Canada, United Kingdom, Singapore, Malaysia, U.A.E. and Mexico.
Continental and its affiliates had combined net sales of $88.4
million for the two months ended September 30, 2011. Due to this
acquisition Reliance's alloy tons sold increased 33% year over year
in the third quarter of 2011.
The company's net debt-to-total capital was 31.0% as of
September 30, 2011. Even after borrowing to fund the acquisition of
Continental in 2011, the company had a substantial remaining
borrowing capacity with only $790 million of outstanding borrowings
on its $1.5 billion credit facility as of September 30, 2011. This
provides ample funds for the company to continue its growth
initiatives through acquisitions as well as internal
Capital expenditure for the nine months ended September 30, 2011
was $112.7 million. For 2011, management expects capital
expenditure to be approximately $200 million primarily driven by
internal growth activities comprising expansions of existing
facilities, purchases of equipment as well as establishing presence
in new geographic markets.
The company also plans to exit various leased facilities and
move into newly built and/or purchased ones. Reliance Steel
continues to evaluate and execute additional growth projects as
appropriate, given the economic conditions and outlook during the
However, Reliance Steel's operating results depend primarily on
prices and availability of metals. In late 2010 and early 2011,
suppliers announced significant price increases for carbon steel
products. Most of the price increases have been raw material cost
driven rather than demand driven.
With no corresponding improvement in demand, these price
increases may not be sustainable and there could be significant
decreases in carbon steel product prices from current levels, which
could have an adverse impact on the company's gross profit margins
The company's non-residential construction market is its largest
end market and continues to be the weakest. Some customers in the
construction industry are in a seasonal business. For a few months
they experience lower revenue due to a reduced number of working
days for shipments of products, resulting from vacation and holiday
closures at some of its customers.
Reliance Steel competes with
Metals USA Holdings Corp.
). Currently, Reliance has a short-term (1 to 3 months) Zacks #1
Rank (Strong Buy) and a long- term Outperform recommendation.
METALS USA HLDG (
): Free Stock Analysis Report
RELIANCE STEEL (
): Free Stock Analysis Report
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