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Reliance Steel & Aluminum Co.’s (RS - Analyst Report) third-quarter 2012 earnings per share of $1.30 outperformed the Zacks Consensus Estimate of $1.20 and surpassed the year-ago earnings of $1.13. Profits improved 15.5% year over year to $98.1 million despite a decline in sales. The bottom line was supported by an inventory adjustment related credit of $27 million (included in cost of sales). 
Revenues fell 3.9% year over year to $2,055.3 million, missing the Zacks Consensus Estimate of $2,099 million. The decline was mostly due to lower pricing in the quarter. Healthy performance across energy, aerospace, farm and heavy equipment, and automotive was somewhat masked by sustained weakness in the non-residential construction market. The company witnessed solid demand across the energy and automotive markets in the quarter.
Sales volume increased 2% year over year but fell 3.5% sequentially in the quarter. Average prices per ton sold went down 6.3% year over year and declined 3.8% sequentially. 
Financial Position
The company exited the third quarter with cash and cash equivalents of $120.6 million, up 32% year over year. Total debt stood at $1.37 billion at the end of the quarter, down 7% from the prior-year quarter. Net debt-to-capital ratio was 26.4% as of September 30, 2012, compared with 31% as of September 30, 2011. 
Reliance Steel remains committed to boosting shareholder returns leveraging its healthy liquidity position. The company, in July 2012, boosted its quarterly dividend by 67% to 25 cents a share from the earlier payout of 15 cents. 
Recent Acquisitions
Reliance Steel continues its acquisition spree to incite growth. Earlier this month, the company wrapped up the acquisition of all of the outstanding shares of Alabama-based steel processor, GH Metal Solutions, Inc. The entity, which has annual sales of roughly $44 million, will now operate as a fully-owned unit of Reliance Steel’s subsidiary Feralloy Corporation.
The company has also purchased Texas-based privately-held Sunbelt Steel Texas, LLC to expand its foothold in the energy space. The acquisition has allowed Reliance Steel to serve customers across a number of oil and gas well drilling categories including vertical, horizontal, directional and deepwater drilling applications. The company hopes to leverage Sunbelt’s growing presence in specialty markets.
Outlook and Recommendation
Looking ahead, Reliance Steel envisions the economic challenges to prevail in the fourth quarter. The company also expects that fewer shipping days in the fourth quarter due to the holidays will result in a sequential decline in sales volume. Moreover, stainless and aluminum prices have been forecast to rise modestly in the quarter while carbon steel pricing is expected to remain weak. Based on these assumptions, the company expects to earn 90 cents to $1.00 per share in the fourth quarter.
Reliance Steel continues to evaluate and execute additional growth projects and is well placed to leverage the strong momentum across a number of end markets. However, we are concerned about the non-residential construction market (the company’s largest end market), which continues to be the weakest link.
Reliance Steel, which competes with Metals USA Holdings Corp. (MUSA - Snapshot Report) and Worthington Industries Inc. (WOR - Snapshot Report), retains a short-term Zacks #4 Rank (Sell). We have a long-term Neutral recommendation on the stock.

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