We are downgrading our recommendation on
Reliance Steel & Aluminum Co.
(
RS
) to Neutral following its mixed second-quarter 2012 results.
Earnings of $1.44 per share topped the Zacks Consensus Estimate by
3 cents. Revenues climbed 8% year over year to $2.21 billion, but
missed the Zacks Consensus Estimate of $2.24 billion.
Revenue growth was driven by higher sales volume and strength
across a host of industries, especially oil and natural gas. Moving
ahead, the company expects the economic challenges to sustain
through the third quarter. The pricing environment is expected to
remain uncertain for certain metals it sells.
Reliance Steel 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.
The company's expansion initiatives and strategic acquisitions
should drive growth this year and beyond. The acquisitions of McKey
and National Specialty Alloys ("NSA") have enabled Reliance Steel
to improve its product offerings and expand into newer markets.
Reliance Steel, in April 2012, wrapped up the acquisition of all
the assets of the Worthington Steel Vonore plant from
Worthington Industries Inc.
(
WOR
). The acquisition, which complements the company's existing
portfolio, will expand its presence in the Southeastern regions of
the U.S. Moreover, the recent acquisition of the assets of Airport
Metals marked Reliance Steel's first foray of into the Australian
market.
In addition, Reliance Steel remains committed to offer incremental
returns to its shareholders. The company recently boosted its
quarterly dividend by 67% to 25 cents a share.
However, we are concerned about the non-residential construction
market (the company's largest end market), which continues to be
the weakest link. In addition, raw material prices are expected to
remain volatile.
Reliance Steel also contends with falling steel and metals prices.
The company is experiencing a declining pricing trend for most of
the metals it sells. Prices for alloy aluminum, carbon steel
products and stainless steel fell in the second quarter. All these
factors lead us to tread with caution.
Our recommendation on the stock is in sync with a short-term Zacks
#3 Rank (Hold).
RELIANCE STEEL (RS): Free Stock Analysis Report
WORTHINGTON IND (WOR): Free Stock Analysis
Report
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