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We are retaining our Neutral recommendation on Reliance Steel & Aluminum Co. (RS - Analyst Report). While the company is seeing strength across automotive and energy markets, a still soft non-residential construction market and the weak pricing environment lead us to take a cautious stance.

Why Retained?

Both revenues and earnings for first-quarter 2013, reported on Apr 25, missed the Zacks Consensus Estimates. Weak demand and lower pricing led to a double-digit decline in revenues. Healthy momentum across automotive, energy and heavy equipment was somewhat masked by lingering weakness in the non-residential construction market. The company expects economic challenges to continue into the second quarter.

Reliance Steel, a Zacks Rank #3 (Hold) stock, 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, in Feb 2013, boosted its quarterly dividend by 20% to 30 cents a share.

Reliance Steel continues its aggressive acquisition strategy to incite growth. It recently closed the acquisition of steel and aluminum components maker Metals USA Holdings Corp. 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 remains challenged by weak steel industry fundamentals and contends with soft steel and metals pricing environment. In addition, raw material prices are expected to remain volatile.

We also remain concerned about the non-residential construction market (the company’s largest end market), which continues to be the weakest link. While there has been a modest recovery of late, demand remains significantly below the peak levels achieved in 2006.

Other Stocks to Consider

Other companies in the metals industry having a favorable Zacks Rank are NSK Ltd. (NPSKY), Worthington Industries Inc. (WOR - Snapshot Report) and Northwest Pipe Co. (NWPX - Snapshot Report). While NSK holds a Zacks Rank #1 (Strong Buy), both Worthington and Northwest Pipe retain a Zacks Rank #2 (Buy).

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