Reliance Steel Updates Outlook

Recently, Reliance Steel & Aluminum Company (RS - Snapshot Report), one of the leading metal service center companies in the US , updated its outlook for the third quarter ended Sep 30, 2009. Reliance expects earnings for the quarter to range from 40 cents to 45 cents per diluted share (no previous range provided). 

The guidance reflects improving gross profit margins, increased steel and aluminum shipping volumes and higher prices. The Zacks Consensus Estimate is pegged at 44 cents per share. Sales of $401.9 million in the month of July were down 2.5% compared to June. However, gross profit rebounded to 21.4% from 19.1% in June and 16.7% in the second quarter of 2009. 

Profitability continued to improve materially as Reliance has purged higher cost inventory. As this higher priced inventory is worked down, pricing improves and demand picks up, we are anticipating a strong rebound in Reliance Steel’s profitability. 

This apart, Reliance has also entered into an amendment of its existing $1.1 billion revolving credit facility that adjusts certain financial covenant ratios and limits certain uses of cash through Jun 30, 2010. 

Pricing was also adjusted and the term for $1.02 billion of the current $1.1 billion revolving credit facility was extended for an additional year to November 2012 from November 2011. Simultaneously, Reliance paid off and terminated its term loan that had an outstanding balance of $444 million. 

The company used $194 million of cash on hand and $250 million of borrowings on the credit facility. On Oct 22, 2009, Reliance Steel is scheduled to announce its financial results for the third quarter and nine months ended Sep 30, 2009. We maintain our Neutral recommendation on the stock.