On Sep 19, we upgraded metals processor
Reliance Steel & Aluminum Co.
) to Neutral. While we take into account softness in the
non-residential construction market and the weak pricing
environment, we are encouraged by strength across automotive and
energy markets and an improving demand environment.
Why the Upgrade?
Both revenues and earnings for second-quarter 2013, reported
on Jul 25, missed Zacks Consensus Estimates. Weak demand and
lower pricing hurt profit. Reliance Steel expects economic
challenges to continue into the third quarter, but sees
improvement in overall demand levels.
Reliance Steel, a Zacks Rank #3 (Hold) stock, has tremendous
earnings capacity with its broad and diversified product base,
along with a wide geographic footprint that positions it well in
the industry. The company continues to evaluate and execute
additional growth projects and is well placed to leverage the
strong momentum across a number of end markets, including
Reliance Steel continues its aggressive acquisition strategy
to incite growth. The acquisition of steel and aluminum
components maker Metals USA Holdings Corp. Metals USA is a
strategic fit with Reliance Steel's portfolio and complements its
existing customer base, product mix and geographic footprint.
In addition, Reliance Steel remains committed to offer
incremental returns to its shareholders. The company raised its
quarterly dividend by 10% to 33 cents per share in Jul 2013.
However, Reliance Steel remains challenged by weak steel
industry fundamentals and contends with soft steel and metals
pricing environment. Prices for stainless and aluminum products
are expected remain weak in the near term.
The steel industry remains affected by overcapacity that
continues to outpace demand. There is not enough demand for steel
products due to weakness in construction end markets, resulting
in excess supply. Contributing toward this inventory glut are
production ramp ups by domestic steel producers and rapid growth
in Chinese production.
We also remain concerned about the non-residential
construction market (Reliance Steel's largest end market), which
continues to be the weakest link. While there has been a modest
recovery of late, demand remains significantly below the peak
levels achieved in 2006.
Other Stocks to Consider
Other companies in the metals industry having favorable Zacks
Northwest Pipe Co.
CIRCOR International, Inc.
). All of them hold a Zacks Rank #1 (Strong Buy).
CIRCOR INTL (CIR): Free Stock Analysis Report
NSK LTD -UN ADR (NPSKY): Get Free Report
NORTHWEST PIPE (NWPX): Free Stock Analysis
RELIANCE STEEL (RS): Free Stock Analysis
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