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Should Investors Rely Upon Reliance?

By Stephen D. Simpson, Simpson, – Updated Nov 16, 2016 at 2:21PM

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Large metal processor pre-announces a strong first quarter.

In my ongoing quest to write about pretty much every metal company in the world, today I bring you Reliance Steel & Aluminum (NYSE:RS) -- a large metals-processing company.

Despite the ongoing sturmund drang about whether or not metals pricing is on the down-slope, Reliance pre-announced a pretty good result for the first quarter. Specifically, the company sees earnings of between $1.30 and $1.40 -- higher than both the company's prior range ($1.05 to $1.15) and the Wall Street consens-a-guess of $1.11.

Although the company didn't provide much detail on the "how" part of the outperformance, management did mention "slight" volume and price increases. That last bit is the interesting part -- although the company was expected to increase its volume, not much was expected in the way of price increases.

Prices for products like carbon steel WERE down in the first quarter compared to the fourth quarter, and carbon steel products make up a large part of the company's product mix.

So how did Reliance do it?

While the company did not go into specifics, a quick look into the commodity markets provides a clue (as does a second look at the company's name). While carbon steel prices were weaker on a sequential basis, aluminum prices were by and large much higher in the first quarter than in the prior quarter.

So when you combine a mild easing of carbon steel prices with much higher aluminum prices (and higher prices for some stainless steel products), you get a net effect of slightly higher overall pricing. Of course, this is only my guess at this point and we won't know for sure until the company reports full earnings later on in the month.

We should also know a little more about the aluminum market tonight when Alcoa (NYSE:AA) reports its earnings. Of particular interest to me and other metal maniacs will be whether strong pricing for the shiny metal is allowing aluminum producers to stay ahead of rising input costs.

In the meantime, the story for the wide range of metal plays -- be they Reliance, Nucor (NYSE:NUE), BHP Billiton (NYSE:BHP), or Commercial Metals (NYSE:CMC) -- remains the same. P/Es are low because nobody expects this boom to last. And they're right -- the boom will end. It's just that nobody really knows for sure when that's going to happen.

For more Foolish metal-ity:

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).

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Stocks Mentioned

Alcoa Inc. Stock Quote
Alcoa Inc.
AA
BHP Group Stock Quote
BHP Group
BHP
$48.87 (-4.57%) $-2.34
Nucor Corporation Stock Quote
Nucor Corporation
NUE
$105.87 (-2.74%) $-2.98
Commercial Metals Company Stock Quote
Commercial Metals Company
CMC
$35.86 (-3.26%) $-1.21
Reliance Steel & Aluminum Co. Stock Quote
Reliance Steel & Aluminum Co.
RS
$170.99 (-2.36%) $-4.13

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