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February 26, 2025
Outperform
TSX: RUS; CAD 41.31
Price Target CAD 50.00
Russel Metals Inc.
Highlights from investor meetings with Russel's CFO
Our view: Yesterday, we hosted investor meetings with Marty Juravsky, CFO of Russel Metals. The topics of discussion centered on 1) the potential impacts of steel tariffs, 2) the compounding benefits of value-add investments, and 3) the strong balance sheet, which we believe provides capital deployment optionality. Overall, the meetings reinforced our view that Russel will benefit in 2025 from rising steel prices and value-add investments, as well as from the integration of Samuel and Tampa Bay. We expect these factors to result in strong EPS growth this year and support a re-rating higher in the shares.
Key points:
Investor meetings. We had the opportunity to host Marty Juravsky, CFO, for in-person investor meetings in Toronto yesterday. Key highlights are as follows:
• Tariffs remain top of mind. Management fielded several questions on tariffs, and highlighted that Russel is a cost pass-through business with limited exports to the US. Moreover, steel tariffs have historically had a positive impact on the company's profitability and therefore management expects a similar outcome; although the impact to the Canadian operation could be more nuanced to the extent tariffs caused a recession in Canada. Net-net, management believes the direct effects on Russel will be positive reflecting a higher steel price environment.
• We believe internal investments will continue to compound. Management spoke to their value-add and modernization initiatives, which they expect will start to bear fruit in 2025 and beyond. Key is we believe these investments will continue to compound with higher levels of investment, and result in reduced earnings volatility, higher incremental margins, and solid earnings growth on the back of investment returns that meet or exceed Russel's internal ROIC threshold of 15%.
• Solid balance sheet provides optionality. Important from the discussion was the progress Russel has made over the last five years rationalizing its portfolio to enhance returns and eliminating its legacy HY debt. With Russel having no net-debt, we view the company as being in a solid balance sheet position to execute on M&A, continue to invest in growth capex, or increase activity under its NCIB. We view this optionality, especially in an uncertain operating environment, as very attractive.
Our view on the shares. Overall, we believe Russel will benefit this year from rising steel prices as well as from recent M&A and modernization/ value-add investments. We expect this to result in meaningful earnings EPS growth in 2025 and to be a positive driver of valuation, closing in our view the unwarranted valuation gap relative to US peers
