Real Industry Inc (NASDAQ:RELY), a USD$50.65M small-cap, is a metals and mining operating in an industry which is sensitive to changes in the business cycle, as it supplies materials for construction activities. Moreover, the basic materials sector can be affected by shifts in the housing market, as many produced raw materials are components of construction projects. For example, if new housing development slows, the demand for metal products may also decrease. Basic material analysts are forecasting for the entire industry, an extremely elevated growth of 30.80% in the upcoming year , and a massive growth of 44.17% over the next couple of years. However this rate still came in below the growth rate of the US stock market as a whole. Should your portfolio be overweight in the metals and mining sector at the moment? Today, I will analyse the industry outlook, and also determine whether RELY is a laggard or leader relative to its basic materials sector peers. View our latest analysis for Real Industry
What’s the catalyst for RELY’s sector growth?
As a whole, the basic materials sector seems like it has reached maturity in its life cycle. Companies appear to be vastly competitive and consolidation seems to be a natural trend. However, the industry is still facing many emerging trends including the reduction of waste, raw material inflation, and innovation in global supply chain management. Over the past year, the industry saw growth in the twenties, beating the US market growth of 10.30%. RELY lags the pack with its earnings falling by more than half over the past year, which indicates the company will be growing at a slower pace than its metals and mining peers. However, the future seems brighter, as analysts expect an industry-beating growth rate of 76.09% in the upcoming year. This future growth may make RELY a more expensive stock relative to its peers.
Is RELY and the sector relatively cheap?
Metals and mining companies are typically trading at a PE of 26x, in-line with the US stock market PE of 22x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a lower 5.76% compared to the market’s 10.06%, potentially indicative of past headwinds. Since RELY’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge RELY’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? RELY’s industry-beating future is a positive for shareholders, indicating they’ve backed a fast-growing horse. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto RELY as part of your portfolio. However, if you’re relatively concentrated in metals and mining, you may want to value RELY based on its cash flows to determine if it is overpriced based on its current growth outlook.
Are you a potential investor? If RELY has been on your watchlist for a while, now may be the time to enter into the stock, if you like its growth prospects and are not highly concentrated in the metals and mining industry. However, before you make a decision on the stock, I suggest you look at RELY’s future cash flows in order to assess whether the stock is trading at a reasonable price, as well as other important fundamentals such as the company’s financial health in order to build a holistic investment thesis.
For a deeper dive into Real Industry’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other basic materials stocks instead? Use our free playform to see my list of over 2000 other basic materials companies trading on the market.