Reliance Steel & Aluminum Co.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Reliance Steel & Aluminum Co. is a diversified metal solutions provider, primarily involved in processing and distributing various metal products across North America, Europe, and Asia.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Reliance Steel & Aluminum Co. (RS) is a major metals service center company that stands out for its geographic diversity and wide range of product offerings. The company provides processing and distribution services for a vast array of metal products, including:

  • Aluminum
  • Carbon steel
  • Stainless steel
  • Alloys

Their operations encompass a network of service centers across North America (U.S., Canada, and Mexico), Europe and Asia. This extensive network allows them to supply a broad spectrum of industries, including manufacturing, construction, aerospace, and transportation. Unlike typical manufacturers, RS offers a wide array of products, including customized processing and logistical solutions, and is not concentrated on single products only. Instead, they cater to diverse customer needs for metals and related services.

Key Business Aspects:

  1. Diverse product offerings: The company does not focus on a single product but instead on a variety of metals like aluminum, stainless steel, carbon steel, and specialty alloys. This also provides some hedge against weakness in a single industry.
  2. Extensive network: Their processing and distribution are geographically diversified, offering some protection against downturns in a particular region and makes the company much more difficult to replicate.
  3. Value added services: RS provides different value adding services like metal processing, logistics, and providing customized solutions to customers.

Industry Trends & Competitive Landscape

  • Highly Fragmented Industry: The metals service center industry is large, fragmented, and highly competitive. They compete with a number of companies of different sizes. Most of the direct competitors are smaller than RS, giving it a scale advantage. However, the low barriers to entry makes the moat of this company weak, and the presence of small to medium sized competitors cannot be taken for granted.
  • Cyclical Industry: Metal prices are cyclical. Metal suppliers’ profitability is tied to the price of these metals in the market.
  • Demand Diversification: Demand for metals comes from a variety of industries. The company has customers in various industrial sectors such as general manufacturing, construction, agriculture, aerospace, and automotive. This makes the company more resilient to sector-specific downturns.
  • Increasing Competition from Low-Cost Suppliers: Global metals markets are constantly evolving. Producers in China and India are slowly entering the US and other markets. This can place a downward pressure on margins.
  • Importance of Supply Chain Management: Reliable, affordable, and fast delivery and processing times are important for customers. As mentioned before, due to their size and geographic presence, RS holds advantage over other competitors, most of whom are smaller.

Financials: Deep Dive

Let’s delve into Reliance Steel & Aluminum’s financials to understand the company’s performance and financial health.

Revenue Analysis:

Reliance has a diversified revenue stream, attributable to sales across numerous segments. For the three months ended September 30th, 2023, the company reported net sales of $3.88 billion across all locations. From a trend perspective, recent quarterly reports indicate that they are still managing to keep their revenues and margins high even with global economic uncertainty. For the nine months ended September 30, 2023, sales were a little more than $12 Billion.

  • Revenue Composition: Their sales are split by product type and geography. They don’t appear to be overly reliant on a single region or product, and instead are diversified. In 2023, the company continued to see consistent growth in sales volumes across the vast majority of its products.
  • Revenue Growth: Revenue growth has been quite volatile in past years depending on global economic conditions and demand, and more recently the company’s total revenue has been more or less stable.

Profitability:

  • Margins: Reliance manages to maintain profitability even in volatile periods. Their net profit margin for the nine months ended September 30th, 2023, was at 8.68%. Gross profit has largely remained stable over past years.
  • Operating Expenses: Operating expenses seem to be stable, although they have increased slightly year over year.
    • SG&A expenses: Selling, general, and administrative expenses, which is one of the largest expenses for the company, have remained stable, but the company’s ability to control costs like these is a factor in its higher margins.

Balance Sheet:

  • Debt: For the financial year ended December 31st, 2022, their long-term debt was about $3.9 Billion, and the overall debt to asset ratio is around 0.35. This low debt to equity ratio is an indication of good financial health. However, for the nine months ended September 30, 2023, the long-term debt has ballooned to $5.3 Billion.
  • Cash Position: They have maintained a healthy cash reserve, with around $848 Million in cash and cash equivalents as of September 30th, 2023.
  • Liquidity: Based on these two factors, the balance sheet appears to be in good health. The company appears to be able to manage its debt obligations, and have enough flexibility to deal with unforeseen situations.

Recent Developments

  • Acquisitions: Reliance has a successful track record of growing through strategic acquisitions. They acquired six metal processing and distribution businesses in the third quarter of 2023, and acquired another in the fourth quarter of 2023. Acquisitions often come at a premium, and integration costs and the price they pay can greatly influence their return on investment. It is crucial for RS to make sure these are good acquisitions.
  • Pricing Their Q3 2023 earnings call noted that they were unable to pass on increasing costs to consumers and had to absorb them, which squeezed margins a little.

Moat Rating: 2/5

Reliance’s competitive advantages can be attributed to:

  1. Scale Advantage: The company benefits from the scale of its operations, resulting in better cost structure and access to customers.
  2. Geographic Diversification: Having a large presence in diverse markets helps lower risks and gives them access to new opportunities.

However, factors such as:

  • Cyclical Demand: The cyclical nature of the metal market.
  • Industry Structure: The highly fragmented industry with low barriers to entry makes their moat less robust.
  • Competition They are still a commodity company and they are always susceptible to competition and price pressure.

Hence their moat rating is around 2/5.

Risk Factors

  1. Cyclical Downturns: RS is exposed to fluctuations in metal prices and industrial demand. Any major economic downturn will affect demand for metals, and will negatively affect sales and margins.
  2. Integration Risk: Their acquisition strategy introduces integration risk. Failure to properly consolidate acquired businesses will hurt future performance. Also overpaying for the businesses will decrease any value that can be gained from such moves.
  3. Rising Competitor: The biggest threat to the company is from the emergence of low cost competitors.
  4. High Dependence on Macroeconomic Factors: Global economic conditions and economic uncertainty affect the company’s revenue and margins. Any geopolitical event could hurt them severely.

Understandability Rating: 3/5

The company’s business model is complex and may not be immediately clear to someone without a business background, especially when it comes to accounting and finances. However, they are in a fairly easy to understand industry (metals) and their methods are not overly complicated if you just analyze them in the simplest way. Hence, an understandability rating of 3/5.

Balance Sheet Health: 4 / 5

The company maintains a pretty strong balance sheet with a healthy cash position and manageable debt. While the company is taking on more debt, it appears that they are using that debt to grow the company rather than for other needs, like paying bills or existing debt payments. They have shown a capacity to deal with volatility in sales and profitability, as shown in recent years. Hence, the company gets a rating of 4/5 in terms of balance sheet health.

Disclaimer

  • This report is for informational purposes only. It does not constitute financial advice and should not be the sole basis for investment decisions.
  • The views expressed are based on available information and are subject to change.
  • The performance of past analysis is not indicative of future returns.