Despite inflationary pressures, steel demand is expected to remain positive this year and the next. With favorable prospects across market segments, steel industry players Reliance Steel & Aluminum (RS) and Olympic Steel (ZEUS) might benefit. However, which stock is a better buy? Read on to find out.
Reliance Steel & Aluminum Co. (RS) is a diversified metal solutions provider and metal service center company. The company distributes several metal products and provides metal processing services to different industries.
On the other hand, Olympic Steel, Inc. (ZEUS) operates as a storage metals products processing and distribution company. It operates through the three broad segments of Carbon Flat Products; Specialty Metals Flat Products; and Tubular and Pipe Products.
Steel demand forecasts remain robust despite the inflationary pressures and the geopolitical situation in Ukraine. The World Steel Association projected steel demand to grow by 0.4% in 2022 to reach 1,840.2 Mt and to surge 2.2% to reach 1,881.4 Mt in 2023.
With the expected deployment of private and public infrastructure projects, the global stainless steel market is expected to grow at an 8.9% CAGR between 2022 to 2030. In addition, the international flat carbon steel market is expected to reach $701 billion, growing at a CAGR of 6.1%.
Both RS and ZEUS are known players in the steel industry and are poised to cash in on the solid demand.
Over the past year, RS’ stock has gained 13.5%, while ZEUS declined 9.9%. Over the past five days, RS has gained 2%, while ZEUS declined 3.6%. However, ZEUS has gained 14.5% year-to-date, while RS has gained 7.2%.
But which stock is a better buy now? Let’s find out.
In April, RS announced that the company remains optimistic about the underlying demand and expects tons sold to be flat to up 2% in the second quarter compared to the first. RS forecasted non-GAAP EPS to come in the range of $9.00 to $9.10 for the second quarter of 2022.
In May, Richard T. Marabito, Chief Executive Officer of ZEUS, said, “We remain optimistic and expect to have a strong second quarter, as we see consistent demand across our end markets and a balanced inventory position in the service center industry.” The company also approved a quarterly dividend of $0.09 per share, which was payable to shareholders on June 15.
Recent Financial Results
For the fiscal first quarter ended March 31, RS’ net sales increased 58% year-over-year to $4.49 billion. Non-GAAP net income attributable to Reliance and non-GAAP EPS improved 99.1% and 105.4% from the same period the prior year to $528.70 million and $8.42.
ZEUS’ net sales increased 50.4% year-over-year to $696.33 million in the fiscal first quarter ended March 31. Adjusted EBITDA rose 48.1% from the prior-year quarter to $56.02 million. Adjusted net income per share improved 57.4% from the same period the prior year to $3.10.
Past and Expected Financial Performance
RS’s revenue, net income, and EPS have grown at CAGRs of 10.3%, 36.6%, and 41.6%, respectively, over the past three years. The consensus EPS estimates for the quarters ending June and September 2022, and the fiscal year 2022 indicate a 77.7%, 12%, and 33.9% year-over-year increase, respectively. Revenue for the same periods is expected to improve by 45.4%, 2%, and 18.8% from their respective prior-year periods.
ZEUS’ revenue, net income, and EPS have grown at CAGRs of 12.6%, 69.1%, and 68.9%, respectively, over the past three years. Street EPS estimates for the quarter ending June 2022 indicate a 5.4% year-over-year increase. However, its EPS for the quarter ending September 2022 and fiscal 2022 is expected to decrease 60.5% and 21% from their respective prior-year periods. Street revenue estimates for the current quarter and the current year indicate a 17.6% and 4.9% year-over-year improvement. However, the consensus revenue estimate for the next quarter reflects a decline of 12.2% from the prior-year quarter.
RS’ trailing 12-month revenue is 6.2 times what ZEUS generates. RS’ trailing-12-month gross profit margin, EBITDA margin, and net income margin of 31.42%, 16.16%, and 10.61% compare with ZEUS’ 21.33%, 8.41%, and 5.36%, respectively.
RS’ trailing-12-month ROE, ROTC, and ROA of 18.53% and 16.51% compared to ZEUS’ 17.96% and 13.06%, respectively.
Thus, RS is the more profitable stock here.
In terms of its forward EV/EBITDA, ZEUS is trading at 4.80x, 8.4% higher than RS’ 4.43x. On the other hand, RS’ forward EV/EBIT multiple of 4.77 is 15.2% higher than ZEUS’ multiple of 4.14.
RS has an overall A rating, equating to Strong Buy in our property POWR Ratings system. On the other hand, ZEUS has an overall rating of B, translating to Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
RS has a B grade for Sentiment, consistent with the favorable analyst expectations regarding its revenue and EPS. On the other hand, ZEUS has a Sentiment grade of C, in sync with its mixed consensus EPS and revenue estimates.
RS has a B grade for Quality in sync with its net income margin and ROTC of 10.61% and 18.53%, 22.5%, and 151.7%, higher than their respective industry averages of 8.66% and 7.36%. ZEUS has a C grade for Quality, which is justified by its net income margin of 5.36%, 38.2% lower than the industry average. Its ROTC of 17.96% is 144% higher than the industry average.
In the 32-stock Steel Industry, RS is ranked #9, while ZEUS is ranked #22. The industry is rated A.
Beyond what we’ve stated above, we have also rated the stocks for Growth, Value Momentum, and Stability. Click here to see the additional POWR Ratings for RS. To see the additional POWR Ratings for ZEUS, click here.
Both RS and ZEUS might benefit from the favorable prospects of the steel market with an expected rise in demand in the coming years. However, given better growth estimates for RS and its relatively wider profit margins, the stock looks like a better buy now.
Our research shows that odds of success increase when one invests in stocks with an overall rating of Strong Buy or Buy. View all the top-rated stocks in the Steel industry here.
RS shares were unchanged in premarket trading Tuesday. Year-to-date, RS has gained 8.23%, versus a -17.39% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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