90.3 F
Los Angeles
Thursday, Aug 11, 2022

Metal Company May Be Steeling Itself for Pickups

Four purchases in six months have put Reliance Steel & Aluminum back on track toward its longtime strategy of growth by acquisition in the metal distribution industry.

The downtown L.A. company announced last week that a subsidiary, Bralco Metals, would acquire Airport Metals Pty. Ltd. in Melbourne, Australia. It is the company’s fourth purchase of the year and its first foray into Australia. Financial terms of the deal were not disclosed.

Reliance operates about 220 metal service centers that distribute steel, alloys and specialty metals in 38 states and nine countries. In total, the company sells sheets, ingots and rolled metals to more than 125,000 customers. Last year’s revenue was $8.7 billion.

Airport Metals supplies aluminum sheeting, metal tubing and welding rods for aviation manufacturers and repair shops in Australia and Oceania.

The recent spate of acquisitions marks a return to form for Reliance. From 1994 through 2009, the company completed 45 acquisitions. The pace slowed dramatically when the recession hit. From 2009 to 2011, the company only did three deals. Now, with the metals market in recovery, opportunities to buy companies on the cheap and Reliance’s strong balance sheet have sparked a comeback.

Karla Lewis, chief financial officer at Reliance, said the company’s Bralco subsidiary in La Mirada had been selling to the Australian market from the United States for several years and had been looking for a facility Down Under. The process led to talks with Airport; Reliance decided to buy into the market rather start from scratch.

“Airport’s business is totally consistent with our business model,” Lewis said. “This was a very important strategic purchase for Bralco’s business.”

In February, Reliance acquired McKey Perforating Co., a metal perforating and fabricating company in Berlin, Wis. In April, the company completed the acquisition of Worthington Steel’s plant in Vonore, Tenn. That same month, the company purchased National Specialty Alloys, a Houston processor and distributor of premium stainless steel and nickel used to make drills and valves for oil exploration equipment. Terms of the deals weren’t disclosed.

Time to buy

Mark Parr, an analyst at Keybanc Capital Markets in Cleveland, said that the weak economy has pushed down prices for metal companies, making it a good time for Reliance to get back into the buying game. Also, the company was prepared for the opportunity.

“Over the years the company has maintained its earning-to-debt leverage within a specific range,” Parr said. “They have money available for acquisitions.”

Parr gives Reliance a “buy” recommendation with a target price of $59 a share, compared with the July 11 closing price of $49.91.

Reliance’s Lewis said the company has a long-term strategy of buying other companies. The company went public in 1994 to access capital for acquisitions and geographic expansion. Financially, the Airport purchase was “a fairly immaterial purchase” on Reliance’s balance sheet.

“The metals service center industry is highly fragmented and there is ample room for consolidation,” she said. “We continue to execute our long-standing strategy to provide growth and value to our shareholders.”

But Anthony Rizzuto, managing director at Dahlman Rose & Co. in New York, believes that Reliance’s strategy means integration problems and bad investments are an ever-present risk. In addition, fluctuating metal prices and demand for metals make the company’s financial performance unpredictable. He gives Reliance a “hold.”

For the first quarter, Reliance reported net income of $116 million,an increase of 26 percent over the same quarter last year and a spike of 71 percent from the previous quarter.

In a statement released with the earnings in late April, Chief Executive David Hannah said the demand for metals in the oil and aerospace sectors fueled the sales gains. He added that the company’s balance sheet provided available cash for more acquisitions.

Price uncertainty

However, Hannah acknowledged that the volatility of metal prices poses a risk for the company’s short-term fortunes.

“There is still some uncertainty regarding the direction of prices for some of the metals we sell, with prices currently moving in different directions for different of our products, but all within manageable ranges,” he said in the statement.

In a note to investors June 11, Rizzuto predicted that the first quarter’s sales and profit margins will probably represent the best numbers for 2012. Falling demand for steel will translate into fewer sales and lower revenue at Reliance for the rest of the year.

“The company’s earnings should be negatively affected from lower shipment levels,” his report stated. “We expect the trend lower to pressure margins over the second half of the year.”

Despite the ups and downs of the market, Reliance’s stock price has traded in a stable range between $46 and $58 in 2012. The company’s stock has gained 2.5 percent for the year.

Parr at Keybanc said consistency and quality acquisitions have been part of the company’s long-term appeal to investors.

“Of all the publicly traded metals names, Reliance has been one of the top performers for a long time,” he said. “It has a low-risk business model and it has stayed focused on its core competency of distribution.”


Featured Articles


Related Articles