The tariffs imposed on steel imports by the Trump administration work in favour of this Canadian company.

Because those tariffs push up domestic steel prices, they raise the value of this stock’s inventory in the U.S.  In the meantime, the company added to its assets in that country with the acquisition of a U.S. steel producer earlier this year. The stock is trading at a low 8.5 times projected earnings for 2019, while the dividend yields a high 6.1%.

RUSSEL METALS (Toronto symbol RUS; www.russelmetals.com) is one of North America’s largest metal distributors. It serves over 28,000 clients at 51 locations in Canada and 12 in the U.S.

In April 2018 the company completed the acquisition of DuBose Steel for an undisclosed amount. DuBose is a structural steel service operation with processing capabilities. From its facilities in Roseboro and Fayetteville, North Carolina, it serves customers along the U.S. East Coast, including the southeast.

Total revenue for DuBose in the year previous to the closing of the deal was roughly $85 million. That’s small in comparison to Russel’s annual sales of over $3.3 billion. But DuBose began adding to profits immediately and lets Russel expand further into the U.S.

In the three months ended June 30, 2018, revenue rose 19.8%, to $978.2 million from $816.5 million a year earlier. The gain came from higher shipments and selling prices.

Earnings in the quarter were $66.1 million, or $1.07 a share. That’s a 103.5% increase from the $32.5 million, or $0.52 a share, a year earlier. The company benefitted from rising steel prices; they increased the value of Russel’s inventory and its profit margins.

Growth Stocks: About 34% of company’s revenues now come from U.S.

The Trump administration has imposed tariffs of 25% on steel imported into the U.S. However, Russel is a steel distributor, rather than a producer. It also processes that alloy into products according to customer specifications. The company generates about 34% of its revenues in the U.S.

Restrictions on steel imports into the U.S., such as tariffs, push up steel prices in that country. In the short term, it raises the value of Russel’s steel inventory. At the same time, it can pass price increases on to its customers.

On the other hand, oil and gas clients supply about 35% of the company’s revenue. That adds to its cyclical risk.

The company holds cash of $117.2 million, or $1.89 a share; its $443.0 million of debt is a reasonable 28% of its market cap. The stock trades at 8.5 times the 2019 forecast earnings of $2.63 per share.

Russel continues to pay quarterly dividends of $0.38 a share; the annual rate of $1.52 yields a high 6.1%. In the past 5 years, Russel’s dividend has grown at an average 1.7% per year.

We will cover Russel’s third quarter earnings in a future issue of Stock Pickers Digest.

Recommendation in Stock Pickers Digest: Russel Metals is a buy.

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