Reliance Steel (RS) Up 19% in a Year: What's Working in Favor?

Shares of Reliance Steel & Aluminum Co. RS have moved up around 18.7% in the past year, outperforming the industry’s rise of roughly 7.9%.

Reliance Steel, a Zacks Rank #3 (Hold) stock, has a market cap of roughly $6.4 billion. Average volume of shares traded in the past three months was around 472.8K.  The company has expected long-term earnings per share growth of 9%.

Let's take a look at the factors that are driving this metals service center company.

Driving Factors

Forecast-topping earnings performance, inorganic growth initiatives along with positive pricing momentum and continuing solid demand have contributed to the rally in Reliance Steel's shares.
 
Reliance Steel's profits surged year over year in the second quarter of 2018 and its adjusted earnings of $3.10 per share exceeded the Zacks Consensus Estimate of $2.71. The company saw continued strong demand across aerospace and automotive markets in the quarter. Notably, Reliance Steel has delivered positive earnings surprises in each of the trailing four quarters with an average beat of 14.8%.
 
The company, during its second-quarter call, said that it is optimistic about business conditions for the third quarter and sees continued improvement in the end markets in which it operates. The company expects demand to remain strong in the third quarter. Additionally, the company expects earnings per share in the band of $2.65 to $2.75 for the third quarter.

Reliance Steel's core business strategy is to enhance operating results through acquisitions. With the takeover of Metals USA, the company has added about 48 service centers throughout the United States. The buyout of Tubular Steel also boosts the company's long-term growth strategy and strength by expanding its product portfolio and end market diversification.

Moreover, the acquisition of Best Manufacturing Inc. highly complements the company's service center network with specialty high-margin products, strong focus on customer service and value-added processing capabilities. The Ferguson acquisition also diversifies its product portfolio. Moreover, the acquisition of DuBose National Energy is in sync with Reliance Steel's strategy to purchase niche businesses that offer specialty products with high levels of value-added processing capabilities at attractive returns.

Moreover, Reliance Steel is seeing continued momentum across aerospace and automotive markets.  Demand in the aerospace market has been driven by higher commercial aerospace build rates. Strong demand is also witnessed in the automotive market, backed by increased use of aluminum in the industry.

Reliance Steel is also expected to benefit from an improving metal pricing environment. Strong demand coupled with Section 232 trade actions on imported steel led to higher pricing in the second quarter. The company expects its average selling prices per ton to increase 1% to 3% on a sequential comparison basis in third-quarter 2018. This should support margins in the third quarter.

Reliance Steel & Aluminum Co. Price and Consensus

 

Reliance Steel & Aluminum Co. Price and Consensus | Reliance Steel & Aluminum Co. Quote

Stocks to Consider

Other stocks worth considering in the basic materials space are Ingevity Corporation NGVT, Huntsman Corporation HUN and Air Products and Chemicals, Inc. APD.

Ingevity has an expected long-term earnings growth rate of 12% and carries a Zacks Rank #1 (Strong Buy). Shares of the company have rallied 60.4% in a year. You can see the complete list of today’s Zacks #1 Rank stocks here.

Huntsman has an expected long-term earnings growth rate of 8.5% and a Zacks Rank #1. The stock has gained 14.2% in a year.

Air Products has an expected long-term earnings growth rate of 16.2% and a Zacks Rank #2 (Buy). Shares of the company have risen 15.1% in a year’s time.

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