On Wednesday, Citi issued a rating change for Reliance Steel & Aluminum Co. (NYSE:RS), downgrading the stock from Buy to Neutral. Alongside this adjustment, the firm increased the price target to $380 from the previous $280. The new target reflects an application of a 12 times multiple to the company's expected EV/EBITDA.
The revision comes despite Citi's acknowledgment of Reliance Steel's strong operational capabilities and the positive structural trends benefiting the company, such as the re-shoring movement in the United States.
The firm highlighted Reliance Steel's impressive EBITDA per ton, which is projected to be around $340 in 2024, doubling that of steel mills. This performance was seen as a testament to the significance of the 'last mile' in steel distribution.
Still, Citi expressed caution in further elevating its forecast for the company, noting that gross margins have stabilized at 30-32% recently. The analyst firm views the stock as fairly valued at a market capitalization of $20 billion, compared to its sustainable free cash flow (FCF) generation of approximately $1 billion and an EBITDA multiple of around 11 times.
The report also compared Reliance Steel's return on invested capital (ROIC) with industry peers such as Nucor Corporation (NYSE:NUE) and Steel Dynamics (NASDAQ:STLD), Inc. It was noted that Reliance Steel's ROIC slightly lags behind these companies and does not, in Citi's view, justify a premium valuation at this time.
InvestingPro Insights
As Reliance Steel & Aluminum Co. (NYSE:RS) navigates through market conditions, recent data from InvestingPro provides additional context to Citi's rating change. The company's adjusted market capitalization stands at $19.08 billion, reflecting its substantial presence in the industry.
The P/E Ratio, a key metric for investors, is currently at 14.53, with a slightly lower adjusted P/E ratio for the last twelve months as of Q4 2023 at 14.27, indicating a stable earnings outlook.
InvestingPro Tips suggest a closer look at the company's dividend trends and total return performance. Reliance Steel's dividend growth over the last twelve months has been robust at 25.71%, coupled with a dividend yield of 1.31%, which may appeal to income-focused investors. Moreover, the company has shown strong price performance with a 39.11% one-year price total return as of the start of 2024, signaling positive investor sentiment.
For those considering an in-depth analysis, InvestingPro offers additional tips on Reliance Steel & Aluminum Co., providing a more comprehensive investment picture. Remember to use the coupon code PRONEWS24 to get an extra 10% off a yearly or biyearly Pro and Pro+ subscription, unlocking further insights that could guide your investment decisions.
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