Flexibility Gives Reliance Steel Opportunity to Prove Its Mettle

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The worldwide steel industry may be in the midst of a massive consolidation, but Reliance Steel & Aluminum Co. has prospered by acting like a smaller player than it really is.


Reliance, which buys bulk steel from producers and then processes it to customer specifications, is coming off a record first quarter on a strategy of sticking to small, short-term contracts.


Its net income of $71.9 million was up 55 percent on a 22-percent rise in revenue to $989 million.


But with interest and energy rates zooming lately, that kind of performance may not be enough to steady the nerves of investors, who have profited by a steady rise in the price of steel to $740 a ton from $300 three years ago.


The fear? The construction, aerospace and other industries sensitive to interest and energy rates as well as steel prices that could go too high could head into a significant slowdown, taking Reliance with it.


As a result, the Los Angeles company, which saw its share price rise from a low of $36.45 last summer to a 52-week high of $99.50 on May 11, has since seen shares drop by almost a quarter to close at $76.04 on June 7.


“No doubt with the threat rising interest rates pose to GDP growth combined with rising energy prices and climbing steel prices, some investors have become a little spooked,” said Mark Parr, managing director with KeyBanc Capital Markets. “But this market is looking strong and all indications are it will continue.”


Indeed, a strong economy and growing demand for steel is one reason London-based Mittal Steel Co. NV, the world’s largest steelmaker, is continuing with its bid to buy Luxembourg-based rival Arcelor S.A.


Parr said a strong demand for new airliners, mainly fueled by demand in Asia and in developing nations, as well as the arrival of a long-promised uptick in non-residential construction in the Southeast and Midwest are in particular playing into Reliance’s hands.


And despite the company’s falling stock price, Reliance remains favored by Wall Street. Five of seven analysts who cover Reliance maintain what amounts to a buy or strong buy rating on the stock, with Tiomna Tanners of UBS starting company coverage last month with a $115 target price.


Moreover, at the end of the month Standard & Poor’s announced it was moving Reliance out of its SmallCap 600 index into its MidCap 400, replacing Commerce Bancorp Inc.


All of that is not surprising, given that Reliance’s strong performance prompted it in May to announce a 1 cent per share increase on its dividend of 5 cents, as well as a two-for-one stock split effective July 5 that might increase liquidity.


Two of the key reasons for this success, analysts say, are a unique distribution strategy and a series of acquisitions, which has allowed it to capitalize on the growth in the steel market.


In an industry dependant on large demand from automakers, construction companies and others that use millions of tons of steel, long-term contracts are a way for steel finishers to guarantee revenue while customers lock in price.


Reliance, however, has chosen to pass on these long-term agreements because Chief Executive David Hannah believes it puts power in the hands of the purchaser, not the seller.


“We don’t go after the long term deals with the auto and appliance makers because then you put the ball in their court,” Hannah said. “We’ve found it much more effective to go after the quick turnaround demand, and supply our customer with exactly what they need for a fair price when they ask for it.”


As a result, Reliance which supplies to smaller companies that make everything from agricultural equipment to construction products has an average price order of just $1,300. But piggybacking several orders on one truck shipment and utilizing its ever-expanding network of more than 100 distribution centers allows Reliance to control costs.


Reliance has had a long-term strategy of acquiring profitable steel finishers and distributors in regions throughout the country it lacks a presence 35 over the past 10 years, the most prominent of which was Los Angeles rival Earl M. Jorgenson Co. earlier this year.


Over the last 12 months Reliance bought a small facility in China, where steel demand has skyrocketed, and doubled the size of a facility in Belgium.


“We have been trying to diversify our geographic diversity as well as product offerings and feel we’ve been very successful with that,” Hannah said.

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