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Reliance Steel Poised on Acquisitions Amid Pricing Headwind

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On Nov 28, we issued an updated research report on Reliance Steel & Aluminum Co. (RS - Free Report) .

Reliance Steel’s adjusted earnings and sales for the third quarter of 2016 missed the respective Zacks Consensus Estimate. Lower volumes and pricing hurt sales in the quarter. Overall metals demand also weakened more than the company had anticipated in the quarter.
Reliance Steel is cautious about business activity levels and metals pricing in the fourth quarter. The company expects overall sales volumes to be down 5%-7% in the fourth quarter compared with the third.

Reliance Steel continues with its aggressive acquisition strategy to incite growth. The acquisition of Aluminium Services UK Limited has allowed Reliance Steel to expand its presence in the aerospace market. The purchase of Fox Metals and Alloys has also strengthened the company's foothold in the oil and gas space. Further, the buyout of Tubular Steel has enhanced the company’s long-term growth strategy and strength by expanding its product portfolio and end market diversification.

In addition, the purchase of steel and aluminum components maker, Metals USA, complements Reliance Steel’s existing customer base, product mix and geographic footprint. The acquisition of Best Manufacturing Inc. also highly complements the company's existing service center network with its specialty high margin products, value-added processing capabilities and strong focus on customer service. The company also recently acquired Alaska Steel Company, a full-line metal distributor.

Reliance Steel is also seeing strong demand for its products across the aerospace and automotive markets. Demand in the aerospace market is being supported by higher commercial aerospace build rates. Strong demand is also witnessed in the automotive market, backed by the company’s toll processing businesses in the U.S. and Mexico as well as increased use of aluminum in the industry. To support the demand, the company has opened a second line to process aluminum for the automotive industry in its Michigan facility and plans to open a new facility in Kentucky in 2017 for aluminum as well as steel processing.

Moreover, Reliance Steel remains committed to offer incremental returns to its shareholders. The company has sufficient liquidity and cash flows to support dividend payouts and share buybacks moving ahead.

However, the company still remains exposed to pricing pressure. Reliance Steel envisions metals pricing for most of its products to witness sustained downward pressure in the fourth quarter. The company anticipates its average selling price in the fourth quarter to be down 1% to 3% sequentially. The company, in its third-quarter call, noted that overall weaker demand and the normal seasonal factors have contributed to pricing pressure.

Moreover, the company’s business in the energy markets is expected to remain under pressure in the near term due to depressed oil prices. Reduced drilling activities are hurting demand for the company’s products in the energy space. While there has been some recovery of late in the non-residential construction market (Reliance Steel’s biggest end-market), demand still remains significantly below the peak levels achieved in 2006.

Reliance Steel is a Zacks Rank #3 (Hold) stock.

Other Stocks to Consider

Better-ranked companies in the steel and metals space include AK Steel Holding Corporation (AKS - Free Report) , Ternium S.A. (TX - Free Report) and POSCO (PKX - Free Report) , all holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

AK Steel has an expected earnings growth of 205.8% for the current year.

Ternium has an expected earnings growth of around 187% for the current year.

POSCO has an expected earnings growth of around 852.4% for the current year.

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