Reliance Steel & Aluminum Co. (RS) in Los Angeles is the largest metals service center company in North America. The company provides a wide range of products from facilities spread across more than 300 locations in 40 states and 13 countries. Cleveland-Cliffs Inc. (CLF) is an independent iron ore mining company operating in two segments: Mining and Pelletizing, and Metallics. CLF is the largest flat-rolled steel company and the largest iron ore pellet producer in North America. It is based in Cleveland, Ohio.
The basic materials industry has been rebounding rapidly over the past couple of months, driven by the rise in construction and manufacturing activities. A bipartisan infrastructure deal, under President Biden’s “Build Back Better” initiative, which is expected to hit the senate floor in mid-July, is expected to facilitate sustainable long-term growth for the industry. This should enable RS and CLF to generate solid returns in the near term.
RS’ shares have gained 13% over the past six months, while CLF has returned 16.1%. Also, RS’ 23.9% gains year-to-date compare with CLF’s 43.8% returns. In terms of their past year’s performance, CLF is the clear winner with 306.6% gains versus RS’s 61.1%.
But which stock is a better buy now? Let’s find out.
Recent Financial Results
RS’ net sales increased 10.3% year-over-year to $2.84 billion in its fiscal first quarter, ended March 31. Its operating income stood at $378.3 million, up 266.2% from the same period last year. Its net income attributable grew 332.6% from its year-ago value to $266.9 million. And its EPS increased 347.8% year-over-year to $4.12.
CLF’s revenues increased 1,027.9% year-over-year to $4.05 billion in its fiscal first quarter, ended March 31. Its operating income grew 324.1% from its year-ago loss to $177 million, while its net income improved 216.3% year-over-year to $57 million from a $49 million loss in the same period last year. The company’s EPS improved 138.9% year-over-year to $0.07.
Past and Expected Financial Performance
RS’ EBIT grew at a 5.4% CAGR over the past three years, while its revenues declined slightly over this period. Analysts expect RS’ revenue to increase 50.1% in the current quarter and 36.1% in the current year. The company’s EPS is expected to grow 128.9% in the current quarter and 113% in the current year. And its EPS is expected to grow at a 11.4% rate per annum over the next five years.
In comparison, CLF’s EBIT and revenues grew at CAGRs of 26.8% and 72.6%, respectively, over the past three years. Analysts expect the company’s revenue to increase 233% in the current quarter and 271.3% in the current year. The company’s EPS is expected to grow 6,966.7% in the current quarter and 1302.2% in the current year. CLF’s EPS is expected to grow at a 27.4% rate per annum over the next five years.
RS is more profitable with gross profit and EBITDA margins of 32.46% and 11.75%, respectively, versus CLF’s 8.43% and 10.89%.
Furthermore, RS’ ROE, ROA and ROTC of 11.27%, 6.30% and 7.42%, respectively, compare favorably with CLF’s 1.07%, 2.37% and 4.10%.
Thus, RS is more profitable.
In terms of forward EV/Sales, RS is currently trading at 0.89x, slightly higher than CLF, which is currently trading at 0.85x. Also, RS’s 6.73 forward EV/EBITDA ratio is 51.4% higher than CLF’s 3.27.
Thus, CLF is the affordable stock here.
RS has an overall A rating, which equates to Strong Buy in our proprietary POWR Ratings system. CLF, in comparison , has an overall D rating, which translates to Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
RS has an A grade for Quality, owing to its higher-than-industry profit margin. RS’ 32.46% gross profit margin is 12.4% higher than the 28.88% industry average. CLF, in comparison, has a D grade for Quality. This is justified because CLF’s 8.43% gross profit margin is 70.8% lower than the industry average.
The large , transformational federal investments to boost the U.S. infrastructure sector over the next few years provides immense growth opportunities for the basic materials industry. Considering RS’ strong performance in the recent quarter coupled with its higher profit margin compared to CLF, we think it is the better buy now.
Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Steel industry here. Also, Click here to view the top-rated stocks in the Industrial - Metals industry.
RS shares were trading at $151.69 per share on Friday afternoon, up $3.29 (+2.22%). Year-to-date, RS has gained 27.79%, versus a 17.25% rise in the benchmark S&P 500 index during the same period.
About the Author: Subhasree Kar
Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.Cleveland-Cliffs vs. Reliance Steel & Aluminum: Which Basic Materials Stock is a Better Buy? appeared first on StockNews.com