RE:FYI: Comment on Q 4 resultsComments and TP's
Raymond James analyst Frederic Bastien said last week’s release of better-than-expected fourth quarter results, including an eighth consecutive earnings per share beat, strengthened his conviction on Russel Metals Inc. (
), believing its “catch-up trade still has legs.”
“Although we expect the changing interest rate environment to affect some sectors of the construction market, we see the company profiting disproportionately from the billions of dollars earmarked for steel-hungry projects in the foreseeable future,” he said. “For this RUS has to thank the reshoring of advanced manufacturing, rising levels of infrastructure spending, and healthy demand from both conventional and green energy sources. This positive backdrop, combined with modest inventory across the supply chain, will also help maintain steel prices well above historical levels. This, at least, is what is implicit in the upward revisions to both our estimates and target price.
“With many U.S. steel stocks ripping to new highs on the strength of healthy industrial and infrastructure markets, Russel also has the potential to play catch-up, in our opinion. Although the stock has lagged behind Reliance Steel & Aluminum (RS) in recent years, its EV/EBITDA multiple discount has recently blown up to a 20-year high of 2.5 times. This aberration is all the more remarkable to us, considering RUS is firing on all cylinders.”
Reiterating an “outperform” recommendation for the Mississauga-based company, Mr. Bastien raised his target to $44 from $36. The average is $38.
Others making changes include:
* Scotia’s Michael Doumet to $38 from $37 with a “sector perform” rating.
“RUS produced its eight consecutive EPS beat, demonstrating continued margin resilience as metal prices gradually normalize from their recent peak,” said Mr. Doumet. “In the last two years, RUS generated EPS of $12.80 and FCF of $8.90, significantly improving its B/S and increasing its BV. Assuming a through-the-cycle ROE of 15 per cent, RUS’s BV of ~$25/share suggests it can generate a mid-cycle EPS of $3.75 (vs. its dividend of $1.52/share). Before considering any M&A, we estimate mid-cycle EPS for the business, as it stands now, amounts to >$2.50 (roughly equivalent to our 2024E). With plate prices still well above historicals and RUS’s energy field stores expected to perform well, we expect RUS to generate EPS above its more than $2.50 run-rate, at least for several quarters.”
* BMO’s Devin Dodge to $34 from $32 with a “market perform” rating.
“RUS appears to be performing well and the strong balance provides the company with flexibility to pursue organic and M&A-related growth opportunities. However, we believe the risk to steel prices remains weighted to the downside and falling steel prices have historically been a challenging backdrop for the stock,” said Mr. Dodge.