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Can Reliance Steel (RS) Keep Its Earnings Streak Alive in Q4?

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Reliance Steel & Aluminum Co. (RS - Free Report) is set to release its fourth-quarter 2017 results before the opening bell on Feb 15.
 
In the third quarter, the company delivered a positive earnings surprise of 8.3%. Reliance Steel posted a profit of $97.3 million or $1.32 per share in the quarter, a roughly 97% surge from $49.5 million or 68 cents per share a year ago. Adjusted earnings of $1.30 per share for the quarter surpassed the Zacks Consensus Estimate of $1.20.
 
Revenues went up around 12% year over year to $2,450.1 million in the quarter, beating the Zacks Consensus Estimate of $2,366 million.

The company witnessed continued demand strength across automotive and aerospace markets along with higher year over year pricing levels in the quarter, which contributed positively to earnings. Demand in the third quarter was stronger than the company’s expectations.

Reliance Steel beat earnings estimates in each of the trailing four quarters, delivering an average beat of 7.2%.

Reliance Steel’s shares have moved up 10.2% in the last three months, outperforming the industry’s 7.7% gain.


 

Let’s see how things are shaping up for this announcement.

Factors at Play

Reliance Steel, in its third-quarter call, said that it remains optimistic regarding activity levels of business in the fourth quarter, which is subject to typical decline in shipping volumes resulting from fewer shipping days due to holiday-related customer closures. The company expects earnings per share to be in the band of 90 cents to $1.00 for the fourth quarter.

The Zacks Consensus Estimate for revenues for Reliance Steel for the to-be-reported quarter stands at $2,307 million, reflecting an increase of 11.9% from the year-ago quarter and a 5.8% decline from the sequentially prior quarter.

Reliance Steel should continue to gain from synergies of acquisitions and continued strong momentum across automotive and aerospace markets in the to-be-reported quarter.

Demand in the aerospace market has been 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 United States and Mexico as well as increased use of aluminum in the industry. Reliance Steel expects sustained momentum across these markets.

However, Reliance Steel is exposed to some pricing and volume pressure in the fourth quarter. The company, in its third-quarter call, noted that it expects tons sold will be down 4-6% in the fourth quarter on a sequential comparison basis. The Zacks Consensus Estimate for shipments for the fourth quarter are pegged at 1,440,000 tons. This reflects an expected decline of around 5.4% on a sequential comparison basis.

The company expects average selling prices to be flat to down 2% in the fourth quarter compared with the third quarter. Currently, the Zacks Consensus Estimate for average selling price per ton sold for the fourth quarter stands at $1,607, essentially flat on a sequential comparison basis.

Earnings Whispers

Our proven model does not conclusively show that Reliance Steel is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here, as you will see below:
 
Zacks ESP: Earnings ESP for Reliance Steel is currently -0.86%. This is because the Most Accurate estimate is at 99 cents per share while the Zacks Consensus Estimate is pegged at $1.00 per share. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
 
Zacks Rank:
Although Reliance Steel’s Zacks Rank #3 increases the predictive power of ESP, its negative ESP makes surprise prediction difficult.
 
Note that Sell-rated stocks (#4 or 5) should never be considered going into an earnings announcement, especially when the company is witnessing negative estimate revisions.

Stocks to Consider

Here are some companies in the basic materials space you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Huntsman Corporation (HUN - Free Report) has an Earnings ESP of +0.84% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Agnico Eagle Mines Limited (AEM - Free Report) has an Earnings ESP of +5.76% and carries a Zacks Rank #3.

Barrick Gold Corporation (ABX - Free Report) has an Earnings ESP of +0.47% and a Zacks Rank #3.

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