Morningstar | Reliance Steel & Aluminum Shines in 1Q; Raising FVE to $78 On Higher Near-Term Profits
Having updated our Reliance Steel & Aluminum valuation model to reflect first-quarter results, we've raised our fair value estimate to $78 per share from $77 on higher 2019 profits. Our long-term outlook and no-moat rating are unchanged.The company is off to a stronger start than we had anticipated. First-quarter operating income grew 14% year on year to $281 million. Although shipment volumes declined, an increase in average selling prices drove higher sales. Our 2019 operating income forecast rises to $930 million from $881 million.
The shares are currently trading 17% above our fair value estimate, as we forecast margin contraction to take hold over our five-year explicit forecast period. We view the company's 29.3% first-quarter gross margin as unsustainable. Indeed, the company itself has long guided to midcycle margins of 27%-29%. We forecast a midcycle (2023) margin of 27.5%.
For the second quarter, management guided to relatively flat sequential volumes and average selling prices but lower gross margins. We view the company's earnings per share guidance of $2.60-$2.70 as achievable. Still, this would represent a sharp decline from adjusted EPS of $3.10 in the same period last year. We maintain a more negative outlook for the seasonally weaker second half of the year. For the full year, we forecast EPS of $9.16 on $11.6 billion of revenue.
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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