Acquisitions And Construction Demand Will Drive Capacity Expansion

Key Takeaways

• Strategic acquisitions and increased demand in construction and aerospace drive Reliance's revenue and market share growth, enhancing competitive positioning.
  
• Stock repurchase efforts and favorable financial conditions aim to boost earnings per share, leveraging a low debt-to-equity ratio.
  
• Exposure to macroeconomic uncertainty, rising material costs, and supply chain challenges could pressure earnings, profitability, and growth plans.

Catalysts

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

• Reliance's recent acquisitions in 2024 are contributing to market share gains, driving volume growth, and supporting revenue increases by expanding capacity and customer offerings.
  
• Increased demand in the nonresidential construction market, especially in areas like carbon steel tubing, plate, and structural products, is enhancing revenue prospects due to the rise in publicly funded infrastructure projects and data center construction.
  
• Anticipated pricing improvements in carbon steel and other metal products are expected to boost revenue and possibly improve net margins by maintaining better alignment with inventory costs.
  
• The company's strong position in the aerospace market, coupled with stable and increasing demand from the defense-related aerospace sector, supports durable revenue streams and earnings power.
  
• Reliance's ongoing stock repurchase program, with substantial remaining authorization, aims to enhance earnings per share by reducing the number of outstanding shares, leveraging favorable financial conditions such as their low net debt-to-EBITDA ratio.

Reliance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Reliance's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.6% today to 6.7% in 3 years time.
• Analysts expect earnings to reach $1.0 billion (and earnings per share of $17.14) by about May 2028, up from $772.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.5x on those 2028 earnings, down from 20.1x today. This future PE is lower than the current PE for the US Metals and Mining industry at 21.6x.
• 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 7.01%, as per the Simply Wall St company report.

Reliance Future Earnings Per Share Growth

Risks

• Ongoing macroeconomic uncertainty both domestically and internationally could slow down the pipeline of new acquisition opportunities, potentially impacting growth and company expansion plans, thereby affecting future revenue streams.
  
• The company is highly exposed to fluctuations in domestic and international economic policies, which can influence demand stability, thus impacting revenue predictability and net margins.
  
• Rising metal costs, particularly for carbon steel and aluminum, have led to a revision in LIFO expense estimates, resulting in potential cost pressures on earnings and future profit margins.
  
• The potential for tariffs affecting strategically important capital expenditures sourced from foreign equipment providers could increase costs, impacting future profitability and capital management flexibility.
  
• Supply chain challenges, especially in the commercial aerospace sector, despite stable demand, pose a risk to reliable revenue generation from this sector, which affects earnings stability.

Valuation

• The analysts have a consensus price target of $327.033 for Reliance based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $15.4 billion, earnings will come to $1.0 billion, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 7.0%.
• Given the current share price of $295.76, the analyst price target of $327.03 is 9.6% 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.