Reliance Steel & Aluminum Co. ( RS Quick Quote RS - Free Report) is benefiting from strong demand across key end-use markets, a diversified product base and strategic acquisitions amid headwinds from higher costs. Shares of Reliance Steel have gained 24.7% in the past year compared with 1.8% gain of the industry. Let’s find out why this Zacks Rank #3 (Hold) stock is worth retaining at the moment.
Image Source: Zacks Investment Research What’s Aiding RS?
Reliance Steel is gaining from strong underlying demand in its major markets. It remains cautiously optimistic about the business environment in 2022 and sees robust demand in the majority of its end markets.
The company witnessed improved demand in non-residential construction, its largest market, in the second quarter of 2022. It is cautiously optimistic that demand for non-residential construction activity in the key areas in which it operates will remain steady into the third quarter. Reliance Steel is also seeing strength in semiconductors and energy markets. Demand also remains steady for the toll processing services that it provides to the automotive market despite the impact of global microchip shortages on production levels. Demand also recovered in commercial aerospace during the second quarter. The company has also been following an aggressive acquisition strategy for a while as part of its core business policy to drive operating results. Its latest acquisitions of Rotax Metals, Admiral Metals and Nu-Tech Precision Metals are in sync with its strategy of investing in high-quality businesses. Reliance Steel also remains committed to boost returns to shareholders leveraging healthy cash flows. It repurchased around 1.1 million shares of its common stock for $193.9 million in the second quarter. The company also generated cash flow from operations of $270.2 million in the quarter. A Few Headwinds
Reliance Steel faces headwinds from cost inflation. It is witnessing higher fuel, freight, packaging and labor costs. Its adjusted selling, general and administrative expenses went up around 11% year over year in the second quarter. The company is expected to continue to face headwinds from inflationary pressure in the third quarter.
The company also expects its shipment levels to be impacted, in the third quarter, by normal seasonal patterns including lower shipping volumes due to planned customer shutdowns and vacation schedules. Reliance Steel estimates its tons sold to be down 3-5% in the third quarter compared with the prior quarter. Average selling price per ton sold is also forecast to be down 5-7% sequentially in the third quarter led by lower pricing for many of its products, especially for carbon, stainless and aluminum flat-rolled products.
Stocks to Consider
Better-ranked stocks worth considering in the basic materials space include
Daqo New Energy Corp. ( DQ Quick Quote DQ - Free Report) , Albemarle Corporation ( ALB Quick Quote ALB - Free Report) and Sociedad Quimica y Minera de Chile S.A. ( SQM Quick Quote SQM - Free Report) . Daqo New Energy, currently carrying a Zacks Rank #1 (Strong Buy), has an expected earnings growth rate of 177.5% for the current year. The Zacks Consensus Estimate for DQ's earnings for the current year has been revised 9.8% upward in the past 60 days. You can see . the complete list of today’s Zacks #1 Rank stocks here Daqo New Energy’s earnings beat the Zacks Consensus Estimate in three of the trailing four quarters, the average being 10.8%. DQ has gained around 7% over a year. Albemarle has a projected earnings growth rate of 425.7% for the current year. The consensus estimate for ALB's current-year earnings has been revised 67.9% upward in the past 60 days. Albemarle’s earnings beat the Zacks Consensus Estimate in each of the last four quarters. It has a trailing four-quarter earnings surprise of roughly 24.2%, on average. ALB has gained around 11% in a year and currently carries a Zacks Rank #1.
Sociedad has a projected earnings growth rate of 520.5% for the current year. The Zacks Consensus Estimate for SQM’s current-year earnings has been revised 18.8% upward in the past 60 days.
Sociedad’s earnings beat the Zacks Consensus Estimate in two of the trailing four quarters, the average being 28.2%. SQM has rallied roughly 98% in a year. The company carries a Zacks Rank #2 (Buy).