Morningstar | Reliance Steel & Aluminum Reports Soft Volumes and Margins in 3Q; $77 FVE Unchanged
Reliance Steel & Aluminum has delivered impressive results in 2018 although third-quarter performance was mixed. The company's profits remained elevated in absolute terms but volumes and margins came in below management's prior guidance. Having updated our valuation model, we've slightly reduced our full-year profit outlook but our $77 per share fair value is unchanged. Our no-moat rating also remains intact.For the third quarter, management had guided to a sequential volume decline of 2%-4% and earnings of $2.65-$2.75 per share. Ultimately, volumes fell 5% and adjusted earnings were only $2.42 per share. For the full year, we now forecast adjusted EBITDA of $1.24 billion and adjusted earnings of $9.60 per share on $11.47 billion of revenue. This sits roughly in line with consensus.
Looking ahead to the fourth quarter, management is guiding to a 5%-7% sequential shipment volume decline, flat-to-slightly-higher average selling prices, and adjusted earnings of $1.75-1.85 per share. Our forecasts lie on the low end of these ranges.
Over a longer time horizon, however, we expect global steel market conditions to deteriorate. This will drive margin contraction for Reliance, as we expect operating margins will decline from roughly 9% in 2018 to 7% midcycle. For reference, the company's 10-year trailing operating margin is just below 7%. With consensus estimates seeming to imply that current favorable market conditions will prove more durable, we believe shares are overvalued.
Reliance Steel & Aluminum is a metals service center company. The company provides metals processing services and distributes a line of metal products, including alloy, aluminum, brass, copper, carbon steel, stainless steel, titanium and specialty steel products, to its customers in a range of industries, including general manufacturing, non-residential construction (including infrastructure), transportation (rail, truck trailer and shipbuilding), aerospace and defense, energy (oil and gas), electronics and semiconductor fabrication, and heavy industry (agricultural, construction and mining equipment). The company also services the auto industry, primarily through its toll processing operations.
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