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Reliance Steel: Share Price In Bubble Territory

Robert Honeywill profile picture
Robert Honeywill


  • Reliance Steel has provided shareholders with mostly double-digit returns over the past six years.
  • The strong returns appear to be partly due to the share price getting well ahead of itself, with share price declines likely.
  • The biggest danger to Reliance Steel's share price, and consequently shareholder returns, is a contraction of its P/E multiple closer to historical levels.
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Reliance Steel: Investment Thesis

Reliance Steel & Aluminum Co. (NYSE:RS), as a business, is operating profitably, although below past performance levels due to the COVID-19 impact. The dividend is safe, and the balance sheet sound. But there appears to be a real danger to the share price from potential multiple contraction.

The present P/E multiple is well above Reliance Steel's historical average. P/E multiple expansion has certainly resulted in strong returns for shareholders over the last six years. With multiple contraction more likely than expansion, negative returns are indicated through the end of 2022, buying at current share price levels. A detailed analysis follows.

Looking for share market mispricing of stocks

What I'm primarily looking for here are instances of share market mispricing of stocks due to distortions to many of the usual statistics used for screening stocks for buy/hold/sell decisions. The usual metrics do not work when the "E" in P/E is distorted by the impact of COVID-19. And if the P/E ratio is suspect, so too, then, is the PEG ratio similarly affected. I believe the answer is to start with data at the end of 2019, early 2020, pre-COVID-19 and compare to projections out to the end of 2022 or later, when hopefully the impacts of COVID-19 will have largely dissipated. Summarized in Tables 1, 2, and 3 below are the results of compiling and analyzing the data on this basis.

Table 1 - Detailed Financial History And Projections

Table 1 documents historical data from 2016 to 2019, including share prices, P/E ratios, EPS and DPS, and EPS and DPS growth rates. The table also includes estimates out to 2023 for share prices, P/E ratios, EPS and DPS, and EPS and DPS growth rates (note - while estimates are shown for analysts' EPS estimates out to 2023, 2024 and 2025 where available, estimates do tend to become less reliable, the further out

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This article was written by

Robert Honeywill profile picture
I am a retired accountant with a background in large mining projects, from feasibility to full-scale operation, large scale primary industry and food processing, commercialisation of university intellectual property, and consulting to small businesses, government departments and insolvency practitioners. I have gained a wealth of experience from having the extreme good fortune to work, in a cooperative environment, with so many people far more intelligent and smarter than me; from scientists and engineers with MBA qualifications, to University professors across a range of disciplines. Through the accident of mergers, acquisitions and dispositions, I held, at various times, financial controller positions within Utah International Inc, General Electric Inc, and BHP Billiton organizations. If I have a special skill, it is in methods of assessment of projects with long lives, where costs are front loaded and/or future revenues are subject to considerable degrees of uncertainty. In relation to stocks, I have a theory, using projections to calculate a present value per share is far less useful for a share buying decision, than using those same projections for calculating future value per share for determining potential exit value and rate of return.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. I do not recommend that anyone act upon any investment information without first consulting an investment advisor and/or a tax advisor as to the suitability of such investments for their specific situation. Neither information nor any opinion expressed in this article constitutes a solicitation, an offer, or a recommendation to buy, sell, or dispose of any investment, or to provide any investment advice or service. An opinion in this article can change at any time without notice.

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Comments (4)

woppenhe profile picture
What are the other American Steel Companies poised to benefit from a boost in infrastructure spending in a 'Buy and support America' themed economy?
Robert Honeywill profile picture
@woppenhe Cleveland-Cliffs would be one.
Office Rat profile picture
"The issue for the [fill in the blank] share price is the current P/E ratio is already far above historical levels. For shares purchased at current price levels, a return of multiples closer to historical levels is likely to result in negative returns through the end of 2022, based on SA analysts' EPS estimates." It seems this would apply to about 95% of the S&P500 these days.
Robert Honeywill profile picture
@Office Rat Yes, the trick is to identify the 5%.
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