There were plenty of stocks for the picking thanks to the latest market rotation as investors bounced back and forth between tech and value names. One company that stood out as an attractive buy on the dip was Reliance Steel & Aluminum Co (NYSE:RS). Here’s why RS stock is a standout.
Reliance Steel is the largest metals service center company in North America, with more than 300 locations in 39 states in the United States and 12 in other countries.
RS provides metals processing services and distributes a full line of more than 100,000 metal and specialty steel products to over 125,000 customers in a broad range of industries. However, it focuses on small orders with quick turnaround and increasing levels of value-added processing.
The company’s service centers acquire carbon steel, aluminum, stainless and alloy steel and other metals products from primary metals producers and then it processes these materials using various techniques to save customers the trouble of investing in the necessary technology, equipment or warehousing of inventory themselves. This is also more cost-effective, as the customer does not have to deal directly with the primary producer.
The Key to RS Stock
What makes RS stock particularly attractive right now is that it is generally less susceptible to market cycles since its service centers are usually able to pass on all or a portion of increases in metal costs to its customers. It is also less vulnerable to changing metals prices. This leads to more consistent results.
In fact, Reliance Steel stayed profitable during the recession of 2009.
Acquisitions to improve capabilities and scale have always been a part of management’s strategy, and it made $1.45 billion worth of acquisitions net of divestitures over the past five years. The largest acquisition recently was the $1.2 billion purchase of Metals USA in 2013, which operated 48 service centers throughout the United States.
I think management’s acquisition strategy is sound, with net debt only 28% of RS stock’s total market capitalization, so the company is not overextending itself financially.
Further Strength Ahead for Reliance Steel
This year has been a good one for RS stock, highlighted by the company’s earnings report. In the latest quarter, earnings-per-share of $1.30 were 11 cents better than expected. Revenues climbed 12.1%, reflecting higher prices and a 5.3% increase in units. The demand environment is solid for its products across most end markets, including heavy industrial and aerospace. Energy is also improving.
RS stock is a little overexposed to weak farm equipment markets than most of the industry, but it has been able to offset this with the strength in other sectors. With demand solid, Reliance Steel management is confident in their fourth-quarter EPS guidance of 90 cents to $1, compared to 84 cents last year.
I think this is very doable, and RS stock should do well as long as the economy is able to stay out of a recession, which I am confident it will. Reliance Steel is now trading around $80, but it could very well turn into an $85 stock soon.
As such, any pullbacks below $75 makes RS stock a very attractive investment.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.