Down But Not Out

Down But Not Out

"Reliance Steel & Aluminum Co. (NYSE:RS) is one of the largest metals service center companies in the United States. Though a network of more than 200 locations in 38 states, Belgium, Canada, China, Mexico, Singapore, South Korea and the United Kingdom, the Company provides value-added metals processing services and distributes a full line of more than 100,000 metal products. These products include galvanized, hot-rolled and cold-finished steel, stainless steel, aluminum, brass, copper, titanium and alloy steel sold to more than 125,000 customers in a broad range of industries. Some of these metal service centers provide processing services for specialty metals only."

The challenge for Reliance, and all other metal service centers, is that lower demand for steel and aluminum is expected to continue through the first half of 2009. Perhaps, we will see the beginnings of a pick-up in demand by the end of the year. Data for the first six months is not available yet. However, it seems that pricing for some types of steel may have bottomed out in the first quarter while pricing for other metals has stabilized. There is a disconnect between selling prices and the spot market price of metals. Pricing will remain weak until the overall economy shows signs of recovery.

Financial Statements	TTM	12/2008	12/2007	12/2006	12/2005	12/2004
Sales ($M)	8,369.2	8,718.8	7,255.7	5,742.6	3,370.7	2,947.2
Gross Income ($M)	2,024.2	2,162.1	1,837.5	1,511.2	921.7	836.4
R&D ($M)	0.00	0.00	0.00	0.00	0.00	0.00
Unusual?Extra ($M)	0.00	0.00	0.00	0.00	0.00	0.00
Oper Income ($M)	711.6	770.4	644.8	565.7	341.9	279.1
Interest Exp ($M)	101.5	82.6	78.7	61.7	25.2	28.7
PreTax Inc. ($M)	624.0	765.7	654.4	571.1	333.2	270.0
Net Income ($M)	552.1	482.8	408.0	354.5	205.4	169.7
Oper Cash Fl ($M)	872.0	664.7	639.0	191.0	272.2	121.8
CapEx ($M)	131.0	151.9	124.1	108.7	53.7	36.0
EPS Basic ($)	7.55	6.60	5.39	4.85	3.12	2.61
EPS Diluted ($)	5.34	6.56	5.36	4.82	3.10	2.60
EPS Diluted Cont $	5.34	6.56	5.36	4.82	3.10	2.60
Div/Shr $	0.40	0.40	0.32	0.22	0.19	0.13
Cash Flow/Shr $	9.21	7.89	6.41	5.67	3.81	3.28
FCF/Shr $	9.72	6.57	6.45	0.90	3.11	1.18
Cash & ST Inv $M	33.6	52.0	77.0	57.5	35.0	11.7
Goodwill/Intang $M	1,800.2	1,807.2	1,350.4	1,139.1	429.1	358.5
Total Assets $M	4,807.5	5,195.5	3,983.5	3,614.2	1,769.1	1,563.3
Total Liabilities $M	2,364.5	2,764.0	1,877.2	1,867.8	739.2	740.8
Book Val/Shr $	33.32	33.26	27.85	23.88	15.64	12.66
Avg Shrs Out M	73.3	73.1	75.6	73.1	65.8	64.9

Multiples	TTM	12/2008	12/2007	12/2006	12/2005	12/2004
Price/Earnings	8.0	6.9	9.5	8.1	8.2	6.7
Price/Book Value	1.2	1.3	1.8	1.6	1.6	1.3
Price/Sales	0.3	0.3	0.5	0.5	0.5	0.3
Price/Cash Flow	4.6	5.8	7.9	6.9	6.7	5.3
Price/FCF	4.4	6.9	7.9	43.4	8.2	14.8
Yield%	0.9	0.9	0.6	0.6	0.7	0.7

Ratios	TTM	12/2008	12/2007	12/2006	12/2005	12/2004
Gross Margin%	24.2	24.8	25.3	26.3	27.3	28.4
Operating Margin%	-13.3	8.8	8.9	9.9	10.1	9.5
Net Margin%	6.6	5.5	5.6	6.2	6.1	5.8
ROE%	23.1	21.3	21.2	25.5	22.2	23.1
ROA%	10.7	10.5	10.7	13.2	12.3	11.6
Current Ratio	3.5	3.5	2.9	3.0	2.5	2.7
Payout Ratio%	5.3	6.1	5.9	4.5	6.1	5.0
Liabilities/Assets%	49.2	53.2	47.1	51.7	41.8	47.4
Asset Turnover X	1.6	1.9	1.9	2.1	2.0	2.0

Since it appears that we have averted a depression and are currently experiencing a recession, we can consult our crystal ball and divine the future.  We expect to see verifiable signs of improvement by the end of 2009 and a recovering economy in 2010. If this scenario plays out, Reliance will make several acquisitions among the weaker companies in this market segment. They have successfully followed this strategy in the past.

We see a target price for RS of about $59 in 12-18 months. This would translate into an 11X multiple of our projected free cash flow; a discount to the Company's five year average P/FCF of 16.2X and the seven year average P/FCF of 14.9X.

Disclosure: The author holds no financial interest in RS.