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Reliance Steel (RS) Q1 Preview: Will It Beat Earnings Again?

Reliance Steel & Aluminum Co. RS is set to release its first-quarter 2016 results before the opening bell on Apr 21.

In the last quarter, the metal processor had delivered a positive earnings surprise of 6.10%. But its profits slipped year over year, hurt by lower metals pricing. While the company benefited from improved operational performance and strong customer demand across most of its end markets, it saw pricing pressure due to high levels of metal imports in the quarter.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Reliance Steel, in its fourth-quarter 2015 call, said that it expects overall sales volumes to increase by around 6-8% sequentially in first-quarter 2016 on the back of normal seasonal increase in shipping volumes and additional volume from Tubular Steel, Inc. Reliance Steel also expects average selling price in the quarter to be flat to up 1.5% sequentially. The company expects adjusted earnings for the first quarter in the band of 80 cents to 90 cents per share.

Reliance Steel should continue to benefit from its strategic acquisitions and strength across aerospace and automotive markets in the March quarter. Demand in the aerospace market is backed by higher commercial aerospace build rates. Strong demand is also witnessed in the automotive market, supported by the company’s toll processing businesses in the U.S. and Mexico as well as increased use of aluminum in the industry. Reliance Steel expects sustained momentum across these markets in 2016.

Synergies from acquired businesses should also support Reliance Steel’s results in the first quarter. The company continues its aggressive acquisition strategy to incite growth. As part of this strategy, Reliance Steel recently purchased Arkansas-based Best Manufacturing, Inc., a custom sheet metal fabricator of steel and aluminum products. The acquisition is a strategic fit for Reliance Steel and highly complements its existing service center network given Best Manufacturing’s specialty high margin products, value-added processing capabilities and strong focus on customer service.

However, Reliance Steel remains challenged by weak steel industry fundamentals and still weak steel and metals pricing. Lower prices of metals are hurting its revenues as witnessed in the last quarter. In addition, the company’s business in the energy markets is expected to remain under pressure due to depressed oil pricing.

Earnings Whispers

Our proven model shows that Reliance Steel has the right combination of two key ingredients to beat earnings.

Positive Zacks ESP: The Earnings ESP (Expected Surprise Prediction) for Reliance Steel is +2.27% - the difference between the Most Accurate Estimate of 90 cents and the Zacks Consensus Estimate of 88 cents. This indicates a likely positive earnings surprise.
Zacks Rank #3 (Hold): Reliance Steel’s Zacks Rank #3 increases the predictive power of its ESP.
Note that stocks with Zacks Rank of #1, 2 and 3 have a significantly higher chance of beating earnings. The Sell rated stocks (#4 and 5) should never be considered going into an earnings announcement.  

Stocks that Warrant a Look

Here are some companies in the basic materials sector that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Pretium Resources Inc. PVG has an Earnings ESP of +33.33% and a Zacks Rank #2 (Buy).

Coeur Mining, Inc. CDE has an Earnings ESP of +18.75% and a Zacks Rank #2.

TimkenSteel Corporation TMST has an Earnings ESP of +6.98% and a Zacks Rank #3.

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
PRETIUM RES INC (PVG): Free Stock Analysis Report
COEUR MINING (CDE): Free Stock Analysis Report
RELIANCE STEEL (RS): Free Stock Analysis Report
TIMKENSTEEL CP (TMST): Free Stock Analysis Report
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