On Nov 18, we reaffirmed our Neutral recommendation on metals
Reliance Steel & Aluminum Co.
). While strength across automotive and aerospace markets should
support the company's results, we maintain a cautious stance
considering the weak pricing environment and a still soft
non-residential construction market.
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Earnings for third-quarter 2013, reported on Oct 24, beat the
Zacks Consensus Estimate, but sales missed. Lower metal prices
coupled with higher costs led to a decline in profit. Reliance
Steel expects economic challenges to continue into the fourth
quarter. Lower shipping days due to the holiday season is
expected to hurt sales volume in the final quarter.
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
automotive and aerospace.
Reliance Steel continues its aggressive acquisition strategy to
boost growth. The acquisition of steel and aluminum components
maker Metals USA is a strategic fit with the company's portfolio
and complements its existing customer base, product mix and
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. 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.
Reliance Steel also contends with soft steel and metals pricing
environment. Prices for stainless and aluminum products are
expected remain weak in the near term.
Moreover, the non-residential construction market - Reliance
Steel's largest end market - continues to be the weakest link.
While there have been some recovery of late, demand remains
significantly below the peak levels achieved in 2006.
Other Stocks to Consider
Other metals companies having favorable Zacks Rank are
Mitsui & Co. Ltd.
CIRCOR International, Inc.
). All of them hold a Zacks Rank #1 (Strong Buy).