On Jul 2, we downgraded metals processor
Reliance Steel & Aluminum Co.
) to Underperform. Our view takes into account softness in the
non-residential construction market and the weak pricing
Why the Downgrade?
Reliance Steel had a lackluster first-quarter 2013 (reported on
Apr 25) with both revenues and earnings missing the Zacks
Consensus Estimate. Weak demand and lower pricing led to a
double-digit decline in revenues.
Healthy momentum across automotive, energy and heavy equipment
was somewhat masked by lingering weakness in the non-residential
construction market. The company expects economic challenges to
continue into the second quarter.
Following the release of the first quarter results, the Zacks
Consensus Estimate for 2013 for Reliance Steel has gone down
roughly 11% to $4.90 per share.
Cause for Concern
Reliance Steel, which currently has a Zacks Rank #5 (Strong
Sell), remains challenged by weak steel industry fundamentals and
contends with soft steel and metals pricing environment. In
addition, raw material prices are expected to remain volatile.
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
Other Stocks to Consider
While we prefer to stay away from Reliance Steel, other companies
in the metals industry having a favorable Zacks Rank are
Kaiser Aluminum Corporation
Northwest Pipe Co.
). While NSK and Kaiser Aluminum hold a Zacks Rank #1 (Strong
Buy), Northwest Pipe retains a Zacks Rank #2 (Buy).
KAISER ALUMINUM (KALU): Free Stock Analysis
NSK LTD -UN ADR (NPSKY): Get Free Report
NORTHWEST PIPE (NWPX): Free Stock Analysis
RELIANCE STEEL (RS): Free Stock Analysis
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