Given the volatile ups and downs of today’s market, I thought it was a good time to feature a value pick. Accordingly, today’s recommendation comes from the Cabot Benjamin Graham Value Letter, edited by J. Royden Ward.
“Reliance Steel & Aluminium Co. (RS, $50) is one of the largest metals distributors in the U.S. The company’s service centers provide specialized metals processing services and distribute more than 100,000 metal products, made primarily from steel and aluminum. Reliance initially buys large quantities of raw metals from primary metals producers. The company then sells smaller quantities to customers after cutting and shaping the metals and performing other services. Reliance sells to a diverse array of customers in the machinery, aerospace, oil drilling, mining, farm equipment and construction industries, and to customers in many other industries.
“Reliance has achieved great success by acquiring smaller competitors at bargain prices during the past decade. Sales increased 10% and earnings climbed 20% during the past 12 months. The company exceeded my sales and earnings estimates by a wide margin during the first half of 2012. Results were aided by higher pricing and strong demand from customers in the oil and gas, aerospace and farm and heavy equipment industries. Management expects demand to continue its steady improvement during the next several quarters. I expect sales and EPS to rise 9% during the next 12 months. Reliance’s strong balance sheet will enable the company to continue to acquire competing companies at advantageous prices.
“RS shares sell at 8.3 times current EPS with a dividend yield of 1.2%. The stock price tends to be volatile, as a result of erratic quarterly earnings, but I believe the current low price presents an excellent buying opportunity. I expect RS shares to achieve my 78.08 Min Sell Price within one to two years. Maximum Buy Price: 50.09.”
- J. Royden Ward, Cabot Benjamin Graham Value Letter, August 2012