Reliance Steel & Aluminum Co. – Value |
Are the steel companies the first to see a slowdown? If so, Reliance Steel & Aluminum Company (RS) isn't seeing one. First quarter sales continued to be strong. Investors, however, have been fleeing the stock in recently weeks on worries over the economy which is why it now trades with a P/E of just 10x forward estimates.
This Zacks #1 Rank (strong buy) 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.
Solid Q1 Results
On Apr 28, Reliance Steel reported its first quarter results and surprised on the Zacks Consensus by 15%. Earnings were $1.23 compared with the estimate of $1.07 per share. The company made just 60 cents in the year ago quarter.
It was the third surprise in the last 4 quarters, although if you look at the 5 year earnings surprise chart, you'll see that the last few years have been a bit rocky.
Sales Up 32%
Sales jumped to $1.9 billion from $1.5 billion in the first quarter of 2010 and were also up 21% from the fourth quarter of 2010. While sales rose due to higher pricing, real demand also continued with its steady growth off the recession lows.
Markets with the most growth were the hot sectors energy, oil and gas, farm and heavy equipment, mining, rail cars, barges and general manufacturing.
The weakest area continues to be its carbon steel structural products which is driven by non-residential construction activities. We all know how weak that sector has been since 2009. However, the company has seen selective improvement in some areas around the country.
Volatile Pricing Expected in Q2
Reliance has seen prices fluctuating up and down and it expects this to continue into the second quarter with prices being slightly lower during that time.
But it also expects real underlying demand to continue to improve. The second quarter is historically the strongest of the year and it expects that to be the case this year.
Zacks Consensus Estimates Rise
Analysts revised estimates higher after the first quarter earnings beat in April.
The 2011 Zacks Consensus Estimate rose to $4.76 from $4.48 per share which is earnings growht of 82.3%.
The growth is expected to continue into 2012, with the Zacks Consensus rising to $5.95 from $5.66 per share in the last 2 months. That is further earnings growth of 25%.
Shares Have Been Falling
After a big rally last summer, shares have weakened in recent weeks. Check out the 3-year chart.
This makes the stock even cheaper. It is trading under the S&P 500 average on P/E, price-to-book and price-to-sales.
Its price-to-book ratio is just 1.2, well under the 3.0 cut-off I use for "value" stocks.
The company also has a price-to-sales ratio of only 0.5. A reading under 1.0 usually indicates a stock is undervalued.
It's been over a month since Reliance Steel's bullish first quarter report. We've seen some weakening in the economy since then. However, it hasn't been enough for any lower analyst estimate revisions.
For now, Reliance is a cheap play on the economic growth story.
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