Readers of this space know that the investment bias is toward large-cap companies with demonstrated business models and who have a competitive advantage in established markets, preferably with a favorable global trend as a support. And with the above in mind, Reliance Steel is worth an evaluation.

First, don't think of Reliance Steel & Aluminum (NYSE: RS) as a steel company; think of it as a 'diversified' metal processing services company.

Reliance supplies metal process services and also manufactures metal products for the construction, transportation, aerospace, manufacturing, and semiconductor industries.


Analysts see RS's FY 2008 revenue advancing about 7 to 9%, a downshift from the halcyon 26% revenue growth of FY 2007, due to a decline in steel and aluminum prices. Meanwhile, carbon steel prices should fare better, with some pricing power, and the net result is a slight decline in operating margins.

Meanwhile, Reliance's broad customer base lowers overall client-loss risk, and its spectrum of more than 100,000 products makes it a versatile, customize-oriented, metal processing services company, not a conventional steel operation. Further, RS's strong finances provide another shock absorber/stabilizer, in the event the global economy presents a speed bump or two in 2008-2009. The Reuters FY 2008/FY 2009 EPS consensus estimates for RS are $6.11 to $6.51.

The risks? A failure by distributors to rebuild carbon steel inventories would hurt Reliance's results.

The First Call mean rating for RS is: Buy [7 firms]. Mean 2008 target: $69 [high: $80, low: $59].

Stock Analysis: Reliance is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than 2 years should be rewarded from RS's shares. Sell/Stop Loss if you were to purchase shares in this company: $43.

Disclosure: Lazzaro has no positions in stocks. In addition to private real estate holdings, he owns corporate and municipal bonds, and cash certificates of deposit.