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Reliance Steel & Aluminum Co.’s RS shares have shot up 31.8% over the past year. The company has also outperformed its industry’s rise of 3.6% over the same time frame. Moreover, it has topped the S&P 500’s roughly 22.4% rise over the same period.
Let’s dive into the factors behind this Zacks Rank #2 (Buy) stock’s price appreciation.
Image Source: Zacks Investment Research
What’s Going in RS’s Favor?
Reliance Steel is gaining from strong underlying demand in its major markets. It expects demand to remain healthy in its end markets in the fourth quarter of 2023.
Demand in non-residential construction, the company’s biggest market, increased in the third quarter. Based on the current sentiment of customers and existing backlogs, the company maintains an optimistic outlook for the fourth quarter, anticipating that non-residential construction activities in the sectors it operates in will remain healthy, with consideration for the usual seasonal variations.
Reliance Steel is also witnessing higher year-over-year demand for toll processing services for the automobile market. The company’s niche position in providing toll processing services to the automotive market, particularly with the ongoing rise in aluminum usage, instills optimism for long-term demand in this sector.
Commercial aerospace demand also remained strong in the third quarter. RS expects commercial aerospace demand to stay healthy in the fourth quarter as build rates grow from current levels. Moreover, demand in the company’s aerospace business's military, defense and space segments remains robust, with substantial backlogs.
Moreover, RS has been following an aggressive acquisition strategy for a while as part of its core business policy to drive operating results. The acquisitions of Rotax Metals, Admiral Metals and Nu-Tech Precision Metals are in sync with its strategy of investing in high-quality businesses. The acquisition of Southern Steel Supply also expands the company’s reach in the Southern United States and boosts its value-added processing services.
Reliance Steel also remains committed to boost returns to shareholders. It returned $185.1 million to its stockholders during the third quarter of 2023 through dividends and the repurchases. RS generated $466 million in cash flow from operations in the quarter, owing to its strong profitability and good working capital management. Reliance Steel, in Feb 2023, also increased its quarterly dividend by 14.3% to $1.00 per share.
Earnings estimates for Reliance Steel have also been going up over the past two months, reflecting analysts’ optimism. The Zacks Consensus Estimate for RS for 2024 has increased around 1.7%. The consensus estimate for fourth-quarter 2023 has also been revised roughly 1% upward over the same time frame.