Diversification Into Infrastructure, Aerospace, And Automotive Will Drive Future Demand

Key Takeaways

• Reliance's acquisition strategy and diverse market focus could drive future revenue growth by enhancing processing capabilities and capitalizing on sector improvements.
  
• Strong balance sheet and share repurchase plan use could boost EPS, leveraging undervalued stock prices and improved profit margins through strategic policies.
  
• Declining metal prices, inventory cost misalignments, and high cash outflows could pressure profitability and liquidity, while trade disruptions and demand variances pose revenue risks.

Catalysts

Operates as a diversified metal solutions provider and the metals service center company in the United States, Canada, and internationally.

• Reliance's acquisition strategy in 2024, which added approximately $400 million in net sales, is expected to continue given their robust acquisition pipeline, potentially driving future revenue growth.
  
• The company plans to enhance value-added processing capabilities, which could support stronger gross profit margins by warranting premium pricing irrespective of the underlying metal prices.
  
• Reliance's strategic focus on diverse end markets, such as infrastructure, aerospace, and automotive, positions them to benefit from improvements in these sectors, potentially bolstering future demand and revenue.
  
• With $1.15 billion remaining in their share repurchase plan and a strong balance sheet, Reliance is positioned to boost EPS through continued buybacks, especially if stock prices remain undervalued.
  
• Anticipated improvements in gross profit margin from better alignment of inventory costs and potential pricing benefits from trade policies could positively impact net margins and earnings in 2025.

Reliance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Reliance's revenue will grow by 4.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.3% today to 5.9% in 3 years time.
• Analysts expect earnings to reach $922.0 million (and earnings per share of $16.92) by about April 2028, up from $875.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.5x on those 2028 earnings, up from 16.7x today. This future PE is lower than the current PE for the US Metals and Mining industry at 21.5x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.42%, as per the Simply Wall St company report.

Reliance Future Earnings Per Share Growth

Risks

• Declining metal prices, particularly in carbon steel, aluminum, and stainless steel, could continue to pressure margins and profitability, as evidenced by past decreases despite some stabilization noted in Q4 2024. (Gross profit margin)
  
• Fluctuations and misalignment in inventory costs and replacement costs with LIFO adjustments present financial unpredictability, potentially affecting net earnings if end-of-year true-ups are unfavorable. (Net earnings)
  
• High cash outflows for acquisitions, share repurchases, and capital expenditures, while potentially beneficial for growth, could strain cash reserves and affect financial flexibility, impacting liquidity and future earnings if not balanced properly. (Cash flow and liquidity)
  
• Any abrupt changes or disruptions in trade policies, especially regarding tariffs on materials such as steel and aluminum—could lead to unforeseen cost implications and market volatility, affecting revenue and pricing strategies. (Revenue and pricing)
  
• Demand variances in key sectors like heavy equipment and semiconductor industries showing weakness or restraint could undermine expected volume growth, impacting revenue generation if market conditions remain subdued. (Revenue)

Valuation

• The analysts have a consensus price target of $328.033 for Reliance based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $362.0, and the most bearish reporting a price target of just $307.23.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $15.6 billion, earnings will come to $922.0 million, and it would be trading on a PE ratio of 18.5x, assuming you use a discount rate of 7.4%.
• Given the current share price of $275.2, the analyst price target of $328.03 is 16.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.