What to make of a company that’s boosted its guidance for the third quarter yet has seen its stock fall about a third since the summer?
Call it a victim of the global steel market.
Reliance Steel & Aluminum Co., one of the largest producers of finished steel in North America, has been on a roll this year, as it has snapped up one competitor after another, upping its revenue and income in the process.
Yet the Los Angeles-based company, which is expected to announce robust earnings this week, has seen its stock slide from a 52 week high of $49.75 in May to a recent low of $29.22 late last month. It rallied some last week and closed at $32.89 last Thursday.
Reliance is not entirely isolated from the global steel market, even though it imports only a fraction of its raw materials and acts largely as a middleman buying steel in bulk only to sell it in the form of plates, tubing and coils.
“We’re affected by the price of steel, no doubt. But we don’t have the highs others have, and we don’t have the lows either,” said Dave Hannah, Reliance’s chief executive. “We’re just riding the wave. This is a cyclical industry.”
In this case, the cycle means a growing fear of global overproduction from nations such as China, India, and regions in the former Soviet Union and Eastern Europe overproduction that would be exacerbated by the woes of U.S. automakers, a slowing residential real estate market and the specter of rising interest rates.
In short, lessening demand amid a glut of steel would lower Reliance’s front end costs but trim its sales and profit margins.
“It is very likely in the near future we will have to face a serious problem of oversupply,” Paolo Rocca, the president of Italian-Argentine steel giant Techint Group, told a conference of the International Iron and Steel Institute trade group in Buenos Aires this month.
Still, there may be reason for Hannah to be optimistic.
The company is coming off of three straight quarters of record net income, and it said third-quarter earnings, to be released Oct. 10, should come in at $1.35 to $1.40 per share, well above average analysts’ estimates of $1.24.
And despite a residential real estate slowdown and a steady stream of bad news coming out of Detroit, Hannah says that the commercial real estate market, one of the largest domestic users of steel and about 30 percent of Reliance’s business has remained extremely strong.
Also helping ebb the bad news has been the increased U.S. production of transplant automakers, such as Toyota, Hyundai and Honda, which mostly use domestic steel and have seen record sales numbers of late.
