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We have reaffirmed our Neutral recommendation on Reliance Steel & Aluminum Co. (RS - Analyst Report) following its mixed fourth-quarter 2012 results. Softness in the non-residential construction market and the weak pricing environment lead us to tread with caution.  

Why Maintained?

Earnings for the fourth quarter, reported on Feb 21, outstripped the Zacks Consensus Estimate while sales missed. Revenues fell roughly 7% year over year due to lower shipping days and pricing. Strength across energy, aerospace and automotive markets was somewhat masked by weakness in the non-residential construction market. The company expects the economic challenges to sustain in first-quarter 2013.

Reliance Steel has tremendous earnings capacity with its broad and diversified product base, along with a wide geographic footprint that positions it well in the industry. The company continues to evaluate and execute additional growth projects and is well placed to leverage the strong momentum across a number of end markets.

In addition, Reliance Steel remains committed to offer incremental returns to its shareholders. The company recently boosted its quarterly dividend by 20% to 30 cents a share.

Reliance Steel continues its aggressive acquisition strategy to incite growth. The company recently entered into an agreement to acquire all outstanding shares of Metals USA Holdings Corp. (MUSA - Snapshot Report). Metals USA is a strategic fit with Reliance Steel’s portfolio and complements its existing customer base, product mix and geographic footprint.

However, Reliance Steel contends with weak steel and metals pricing environment. Average selling price fell in the fourth quarter, hurting revenues in the process.

We also remain concerned about the non-residential construction market (the company’s largest end market), which continues to be the weakest link. In addition, raw material prices are expected to remain volatile.

Reliance Steel currently carries a short-term (1 to 3 months) Zacks Rank #3 (Hold).

Other Stocks to Consider

Other companies in the metals industry having a favorable Zacks Rank are Worthington Industries Inc. (WOR - Snapshot Report) and Gibraltar Industries Inc. (ROCK - Analyst Report). Both the companies hold a Zacks Rank #2 (Buy).

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