RUSSEL METALS $37.45 (Toronto symbol RUS; TSINetwork Rating: Speculative) (905-819-7777; www.russelmetals.com; Shares outstanding: 61.4 million; Market cap: $2.3 billion; Dividend yield: 4.1%) is one of North America’s largest metal distributors. It serves 39,000 clients at 53 locations in Canada and 12 in the U.S.
In the quarter ended June 30, 2014, Russel’s revenue rose 17.8%, to $893.3 million from $758.1 million a year earlier. Higher demand and selling prices pushed up revenue at its metal services business by 11%. The energy tubular products division, which supplies pipes for oil and gas exploration and development, saw its revenue rise 17%.
Earnings gained 53.3%, to $30.5 million, or $0.50 a share. A year earlier, the company earned $19.9 million, or $0.33. Russel has invested in new plants and processing equipment over the past three years, which has cut its costs and improved its efficiency. That’s paying off with higher profits.
The company holds cash of $52.2 million, or $0.85 a share, and its long-term debt of $459.3 million is a reasonable 20.0% of its market cap. Russel has also raised its quarterly dividend by 8.6% with the September payment, to $0.38 from $0.35. The stock now yields 4.1%.
Russel is cyclical: its sales and profit margins rise quickly when steel prices increase with economic growth. Higher steel prices also raise the value of the company’s extensive inventory. However, if the economy goes into recession, Russel’s shares would fall sharply.
Moreover, clients in the oil and gas industry supply about 35% of Russel’s revenue, which adds to its cyclical risk. But the stock is now hitting new highs, along with rising steel prices and a positive economic outlook. We think it can go higher yet.
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