Reliance Steel & Aluminum (RS)

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Key Statistics

Enterprise Value = $7.281 billion

Operating Income = $968.3 million

EV/Operating Income = 7.52x

Price/Revenue = .47x

Earnings Yield = 16%

Debt/Equity = 41%

The Company

Reliance Steel & Aluminum is a Los Angeles based metals company. They are the largest metal service center operator in North America. Metal service centers take raw metals and convert them into products that meet customer specified products. They currently have 125,000 customers across a wide range of industries. They distribute 100,000 metals products including stainless and special steel, aluminum, brass, copper products, etc. While it has only been a public company since 1994, they have been in business since 1939 and have grown through the growth of the US economy and acquisitions.

Sentiment against the stock isn’t quite in the realm of hatred. It is more like mild reluctance. Year to date, the stock is down 15.9% mostly due to jitters about Tariff Man raising metals prices and dampening demand.

My Take

I believe this is a situation where macro worries are dampening enthusiasm for the stock and these worries aren’t showing up in the actual performance of the business. The company is still delivering solid returns on capital, currently boasting an 18% return on equity. Its size and breadth of the customer base is also a significant strength.

If the steel industry does enter a downturn, Reliance Steel & Aluminum is actually in a great position to strengthen its competitive position through the acquisition of smaller competitors. Their financial situation is impeccable, with an F-Score of 9 and a debt to equity ratio of 41%.

From a valuation standpoint, the company is at a significant discount to its history and industry averages. The current P/E of 6 (forward P/E is 9). This compares to an industry average of 13. The 5-year average for the company is a P/E of 14.77. An increase from the forward P/E of 9 to its historical average would be an increase of 64%. The enterprise multiple of 7.52 compares to a 5-year average of 11, a 45% discount. On a price/revenue basis, it currently trades at 47% compared to an industry average of 162%.

Overall, Reliance Steel & Aluminum is in a strong financial position with a dominant position in a competitive business. It trades at a significant discount to its intrinsic value, providing an ample margin of safety.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.