Coverage Initiated on Reliance Steel

We initiated coverage on Reliance Steel & Aluminum Company (RS - Analyst Report) with an Outperform rating, reporting strong net income of $84.9 million or $1.13 per share in the third quarter of 2011 versus $48.7 million or $0.65 in the prior-year quarter, exceeding the Zacks Consensus Estimate of $1.11.

During the third quarter of 2011, sales were $2.14 billion, up 29% year over year. The company sold 1.08 million tons of metal, up 13% year over year and the average price per ton sold was up 16% compared with the prior-year quarter.

In the quarter, carbon steel sales were 53% of net sales; aluminum sales went up 15%; stainless steel sales jumped 15%; alloy sales climbed 11%; toll processing sales inched up 2%; while Other sales came in at 4%.

Cash and cash equivalents were $91.1 million at the end of September 30, 2011 versus $72.9 at the end of December 31, 2010. Net debt-to-total capital ratio was 31.0% as of September 30, 2011. The company has plenty of capital to grow its existing operations as well as acquisition opportunities.

During the quarter, Reliance Steel completed the acquisition of Continental Alloys & Services Inc. for $415 million.

Effective July 26, 2011, Reliance Steel renewed its credit facility for a five-year term and increased the size to $1.5 billion from $1.1 billion, providing more capital to fund the growth of the existing operations as well as anticipated acquisition opportunities.

Reliance Steel spent $112.7 million for capital expenditures by the end of September 30, 2011, including a buyout of certain facilities that were previously leased as well as purchase of land and construction of new facilities.

Reliance Steel expects the prices for its various metals to remain volatile through the fourth quarter of 2011, with a downward bias, resulting in slightly lower prices for its products.

The company also expects lower tons sold during fourth-quarter 2011 due to fewer shipping days, which is the normal seasonal pattern. Given these expectations, the company forecasts earnings per diluted share in the range of 70 cents to 80 cents for the fourth quarter of 2011.

Reliance Steel expects a continued slow and steady improvement in demand across all the end markets throughout 2011. Prices are currently at high levels for most products sold. The company expects a downward pressure on pricing for most products later in the 2011, unless overall demand improves significantly.

However, the company expects the average selling price for 2011 to be at or above the 2010 average selling price. In an environment of improving demand and moderate price fluctuations, up or down, the company anticipates that it will be able to maintain its gross profit margins in the range of 25% to 27%. Reliance Steel continues to focus on cost controls and inventory turnover, indicating improved financial results in 2011 as compared with 2010.

Reliance Steel faces stiff competition from Metals USA Holdings Corp. (), Worthington Industries Inc. (WOR - Snapshot Report) and privately held Ryerson Holding Corporation.

We maintain our Outperform recommendation on Reliance Steel. Currently, it holds a Zacks #3 Rank (Hold) on the stock.