The steel companies are navigating a difficult market as consumer demand appears to be solid but prices are declining. Reliance Steel & Aluminum Company (RS) is still expected to post double digit earnings growth in both 2011 and 2012. This Zacks #1 Rank (strong buy) is also a value stock with a forward P/E of 10.9.
Reliance Steel provides metals processing services through more than 200 locations in 38 states, and several countries including Mexico, China, South Korea and Canada.
Headquartered in Los Angeles, its products include galvanized, hot-rolled and cold-finished steel, stainless steel, aluminum, brass, copper, titanium and alloy steel.
Sales Jumped 29% in the Third Quarter
On Oct 27, 2011, Reliance Steel reported its third quarter results and surprised on the Zacks Consensus for the third time in the last four quarters. Earnings per share were $1.13 compared to the Consensus of $1.11. This is also 74% higher than the 65 cents it earned in the year ago period.
Sales rose 29% to $2.1 billion from $1.7 billion in the third quarter of 2010. Sales also climbed 4% from the second quarter of 2011. The company saw better demand than it anticipated but there was significant downward pressure on pricing and margins especially in July and August.
Its strongest markets continue to be in energy, oil & gas, aerospace, farm and heavy equipment and auto.
Tons sold rose 13% from the year ago quarter and 4% from the second quarter. Average price per ton sold was up 16% year over year but was flat compared with the second quarter of 2011.
Carbon steel sales made up 53% of net sales with aluminum and stainless steel both coming in at 15%.
Looking at the Fourth Quarter
Reliance expects the prices of the various metals to remain volatile throughout the fourth quarter but to ultimately exhibit a downward bias which would result in slightly lower prices for its products.
Due to seasonal patterns and a reduced number of shipping days, it also forecasts lower tons sold in the fourth quarter.
The company provided earnings guidance for the quarter between 70 and 80 cents. The analysts are feeling a bit more bullish as the Zacks Consensus Estimate stands at 77 cents, which is at the high end of the company’s range.
Double Digit Growth Still Expected in 2012
2011 is expected to go out with a bang with earnings growth of 71%. The Zacks Consensus Estimate is calling for $4.45 per share and it only made $2.61 per share last year.
But growth is expected to continue into 2012.
1 estimate was revised higher in the last week pushing the 2012 Zacks Consensus Estimate up to $5.40 from $5.34. That is further earnings growth of 21%.
Lots of Value
Shares have been on a roller coaster over the last 2 years. In 2011, they got stung in the summer sell off as everyone worried about the global economy.
But they have bounced back and are closing the year off the worst of the losses.
But there is still a lot of value.
In addition to a P/E of just 10.9, it has a price-to-book ratio of 1.2. A P/B under 3.0 usually indicates value.
The company also has a low price-to-sales ratio of 0.5. A P/S under 1.0 can mean that a company is undervalued.
Reliance rewards its investors with a dividend, currently yielding 1%.
Investing in the steel companies may seem risky right now given the uncertainty in the global economy going into 2012 and the issue of declining prices.
But Reliance is on track for another year of double digit growth and is an attractive value stock at current valuations.
Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Turnaround Trader and Insider Trader services. You can follow her on twitter at traceyryniec.
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