It's metals week on Wall Street, investors, and our next company to discuss will be value-added metals processor Reliance Steel & Aluminum (NYSE:RS), which reports its Q2 2006 numbers tomorrow.

What analysts say:

  • Buy, sell, or waffle? Six analysts follow Reliance, splitting their votes down the middle between buy and hold.
  • Revenues. Such ambivalence is surprising, though, considering the big, big numbers the analysts are predicting for tomorrow. For example, they expect to see sales rocket 74% to $1.4 billion.
  • Earnings. They also expect profits to rise by a less impressive -- but still pretty darn good -- 59% to $2.35 per share.

What management says:
Reliance has been going on a bit of an acquisition binge lately. In April, the firm completed its acquisition of Earle M. Jorgensen (EMJ) -- a major deal, considering that EMJ had annual sales of more than half what Reliance proper had been selling. Earlier this month, Reliance announced an agreement to acquire the Connecticut metals processor Yarde Metals -- yet another sizeable deal, with Yarde recording roughly $385 million in annual sales.

The combined company now sells approximately $5.5 billion annually, making a profit margin of a little more than 6%, pro forma.

What management does:
At first glance, therefore, these purchases don't look like terribly attractive deals. After all, despite compression of gross margins over the past 18 months, Reliance has continued growing both its operating and its net margins.

Margins %

12/04

3/05

6/05

9/05

12/05

3/06

Gross

28.3

27.8

27.1

26.8

27.3

27.4

Op.

10.3

10.6

10.1

10

10.8

11.4

Net

5.8

6

5.8

5.8

6.1

6.5

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
On the other hand, Reliance did not provide a whole lot of information about its Yarde purchase. But if the criteria management used for that purchase were the same used in buying EMJ, I suspect that the combined company's future profit margin could actually be a bit higher than 6%. Although Reliance proper netted 6.5% in the past 12 months, for fiscal 2005, the firm's take was just 6.1%. Contrast that with EMJ's 6.8%, and you see why Reliance wanted this deal. If Yarde, too, boasts greater profitability than the pre-buying-binge Reliance did, we might expect the above chart to show even more improvement in profitability in quarters to come.

Competitors:

  • Allegheny Technologies (NYSE:ATI)
  • AM Castle (AMEX:CAS)
  • Gibraltar Industries (NASDAQ:ROCK)
  • Olympic Steel (NASDAQ:ZEUS)
  • Ryerson (NYSE:RYI)
  • Steel Technologies (NASDAQ:STTX)

Nothing's sure in investing. For an argument on why Reliance's expected improvement in profits might fail to materialize, read Stephen Simpson's write-up of the company's Q1 2006 results: "Should Investors Rely Upon Reliance?"

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Fool contributor Rich Smith does not own shares of any company named above.