Wolfe Research has adjusted its stance on Reliance Steel & Aluminum (NYSE: RS), downgrading the stock from Peer Perform to Underperform due to anticipated risks to margins from more conservative steel price forecasts following the company’s second-quarter performance.
The downgrade, which came on Friday, also takes into account expectations for reduced free cash flow (FCF) and share buybacks in the coming years.
The firm's analyst pointed out that their estimated EBITDA for Reliance Steel & Aluminum for the years 2024 and 2025 stands at $1.51 billion and $1.46 billion respectively, which is notably lower than the consensus estimates of $1.65 billion for 2024 and $1.6 billion for 2025.
The valuation of the company is considered high, especially in the context of a slowdown in construction, with Reliance Steel trading at 12 times Wolfe Research's estimated 2025 enterprise value to EBITDA (EV/EBITDA) ratio, compared to the consensus of 10.3 times.
Wolfe Research also noted that Reliance Steel's valuation appears rich when compared to its peers in the industrial distribution sector. This assessment is based on the company's trading multiples, which are well above the 12-month average of 9.9 times and the three-year average of 8.4 times.
The forecast for the company's free cash flow is also a concern, with projections indicating a decline to $800 million in 2025 from an expected $1.1 billion in 2024 and $1.2 billion in 2023. The anticipated decrease in free cash flow is seen as a potential challenge for the company to maintain its recent rate of more than $500 million in share buybacks, as seen in the second quarter.
Reliance had disclosed mixed Q2 2024 results, marked by strategic growth through acquisitions amidst a challenging pricing environment. The firm's customer-centric approach and diversification strategy led to increased shipments, although declining metal pricing has negatively affected the gross profit margin. Despite these pressures, Reliance remains optimistic about its long-term business model and is actively pursuing further acquisitions. The company's financial activities for the quarter included repurchasing common stock, paying dividends, and investing in capital expenditures, with a 2024 CapEx budget of $440 million.
Reliance's non-GAAP diluted earnings per share for Q2 were slightly below the expected range. The company anticipates continued margin pressures in the upcoming third quarter due to stable demand but lower prices for carbon steel products. The firm expects a 2.5% to 4.5% decrease in tons sold for Q3, but a 4.5% to 6.5% increase year-over-year. The company's projections for non-GAAP earnings per diluted share for Q3 range between $3.60 and $3.80.
InvestingPro Insights
Following Wolfe Research's downgrade, investors might be seeking additional data points to assess Reliance Steel & Aluminum (NYSE: RS). Insights from InvestingPro reveal a nuanced picture of the company's financial health and market performance. As of the last twelve months as of Q2 2024, Reliance Steel has a market capitalization of $17.14 billion, with a P/E ratio that has slightly increased to 15.08, reflecting a market sentiment that aligns with earnings expectations. Despite a decrease in revenue growth by -9.27%, the company maintains a robust gross profit margin of 30.25%, indicating effective cost management relative to its sales.
The company's dividend yield stands at 1.43%, with a notable dividend growth of 10.0% during the same period, showcasing a commitment to returning value to shareholders. This is particularly relevant in light of Wolfe Research's concerns about declining free cash flow and its implications for future share buybacks. Moreover, the company's stock is trading at 90.05% of its 52-week high, which might suggest room for growth or a need for caution, depending on broader market trends and individual investment strategies.
Investors considering Reliance Steel & Aluminum's stock can also refer to the additional PRONEWS24 InvestingPro Tips available, which provide deeper insights into the company's financials and market performance. With these tips, users can make more informed decisions and potentially uncover investment opportunities that align with their financial goals. Remember to use coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription to access these valuable insights.
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