Reliance Steel & Aluminum (NYSE: RS) made my 2008 short list. It processes and distributes more than 100,000 products made of carbon, alloy, stainless, and specialty steel, as well as aluminum, brass, copper, and titanium. It serves more than 125,000 customers. On December 28, 2007 RS closed at $54.32 per share.
Commodities have been hot the last few years and there has been a lot of activity as the steel market in particular has seen a lot of mergers. The downturn in construction in the latter half of 2007 has affected the stock prices of most companies producing building materials, and most of the steel mills would be included in that category.
Reliance seems to have escaped that pitfall by making value-added products for a very broad range of industries and customers. This specialization is why I picked it over one of my other contenders Nucor Corporation (NYSE: NUE), which is one of the world leaders in the idea of mini-mills. Nucor is a wonderful company that has been very successful; however, in a sputtering economy you have to be able to distinguish yourself from the crowd.
Right now the entire steel industry seems to be on sale and perhaps priced for a recession. Reliance has a P/E of 9.6 and a PEG ratio of 0.71, so unless there is something here that is well concealed, it seems way too low. You can see from the five year chart that 2007 was very erratic but had you gotten in at the beginning of the year when I first wrote about RS you would have done quite well.
Last week it was announced that Reliance opened a Valex Corp. facility in China. This should allow for expansion at lower price points for many products and further integration into eastern markets. I wish RS would raise its meager dividend of 0.63%, but as long as they can continue to increase ROE by 25% and ROIC by 18% can we really complain? The more I learn about this company the more I am convinced it will be a meal for some bigger fish.
To find potential opportunities and verify my track record, read Chasing Value and Serious Money.
DISCLOSURE: I am an active investor. I do not own shares of RS but may acquire shares at a future date.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm.
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