Wall Street went gaga over the bang-up results from value-added metals processor Reliance Steel
At first glance, the Street's reaction was both understandable and absolutely logical. The company earned its owners $5.19 per share, fully diluted, for a jaw-dropping 385% increase over fiscal 2003 profits. And it did all that on "just" a 56% increase in sales. Outstanding.
But as I said, that's just the first glance. The surface results. Or, as we call it at The Motley Fool, the "CNBC story." For serious investors, however, it's not the surface results that matter most; it's the second glances that make the difference over the long term. Buy on the same news that everyone else is reading, and you're likely to get stuck holding a momentum stock long after the momentum has gone. Buy (or sell) on the numbers hidden in plain sight but ignored by the Street, and you might well save yourself some pain.
To wit, here are a few numbers and factoids -- some favorable, some less so -- contained in Thursday's earnings release that jumped out and grabbed this Fool's attention:
- Reliance's quality of earnings remains strong, as evidenced by rates of inventory growth (21.4%) and receivables growth (48.8%) that were both slower than the strong increase in sales.
- Nonetheless, the purchases of extra inventory and delays in collecting payment took a toll on Reliance's free cash flow. In contrast to reported growth in profits under generally accepted accounting principles, free cash flow actually declined by 1.3% year-on-year.
- Share dilution for the year was well within the acceptable range, at 2.5%.
- Reliance anticipates "favorable" pricing and demand in 2005. That's good news for steel investors and a cause for sighs of relief at peers Steel Technologies
(NASDAQ:STTX)and Novamerican (NASDAQ:TONS), as well as at primary steel producers such as U.S. Steel (NYSE:X), Nucor (NYSE:NUE), and AK Steel (NYSE:AKS).
- On the other hand, Reliance does not expect to see the same "rapidly accelerating metal prices" in 2005 that we saw in 2004. On the contrary, Reliance expects 2005 to be a good year in comparison to "all years other than 2004." Foolish investors should take that as code for: "If you're basing your valuations on further high-double- and triple-digit sales and profits increases, you'd better find another industry to invest in."
So to sum up, Reliance had a strong year in 2004, and investors who saw this coming early can be proud of their foresight now, as well as appreciative of company management. As we enter 2005, however, it's likely that the steel industry's rocket has finished its acceleration stage and has now reached cruising speed. The next question, of course: How long until the descent begins?
Read the latest news on this red-hot commodity in:
- Mittal's Riveting Performance
- Denting Steel Dynamics
- U.S. Steel: X Marks the Spot
- Steelmaker Processes a Good Quarter
- The Coming Crash