On today’s TSX Breakouts report, there are 24 stocks on the positive breakouts list (stocks with positive price momentum), and 22 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is dividend stock that’s had impressive near-term price momentum but still falls short of appearing on the positive breakouts list – Russel Metals Inc. (RUS-T). Over the past 11 trading sessions, the share price has rallied 9 per cent.
The company will be releasing its first-quarter earnings results on May 8. Another earnings beat could send the share price back up to record levels. However, capping the potential upside are concerns surrounding an imminent recession. The stock also faces a major ceiling of resistance around $37.50. Consequently, the recent strength in the share price may be short-lived.
A brief outline on Russel Metals is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Mississauga-based Russel Metals is a distributor of metals, chiefly steel and steel products. The company has three core business segments.
Its largest segment in terms of revenue contribution is metals service centers. This business segment purchases products from North American steel producers and distributes these metal products to roughly 35,000 customers.
At its energy field stores, products such as valves, pipes and tubes used in oil and gas production are purchased and sold to its customers operating in the energy industry.
Its steel distributors segment distributes steel in large volumes to manufacturers and other steel service centers.
No customer represents more than 2 per cent of its total revenue and its top 10 customers account for less than 10 per cent of revenue.
The terms of its 2022 revenue breakdown, 70 per cent of total revenue stemmed from metals service centers, 18 per cent from energy field stores and 12 per cent was from steel distributors.
Investment thesis
- Industry leader. Russel Metals is one of North America’s largest purchasers of steel. Consequently, the company has purchasing power and can purchase steel from producers at attractive prices.
- Coming off of record earnings. In 2022, the company realized record revenue, topping $5-billion. earnings before interest, taxes, depreciation and amortization (EBITDA) and net income were the second highest in the company’s history in 2022, behind record levels reported in 2021. For 2023, earnings are expected to materially decline.
- Healthy balance sheet to fund the company’s growth.
- Infrastructure spending commitments. Infrastructure Investment Act, the Inflation Reduction Act and the CHIPS Act support steel demand.
- Reasonable valuation.
- Attractive and consistent dividend. Current dividend yield of 4.4 per cent.
- Key potential risks to consider: 1) economic slowdown/recession; 2) volatility in steel prices; and 3) negative investor sentiment for cyclical stocks.
Quarterly earnings results
After the market closed on Feb. 9, the company released better-than-expected fourth-quarter financial results.
Reported EBITDA was $97-million, surpassing the consensus estimate of $86-million. Earnings per share came in at 93 cents, above the Street’s forecast of 76 cents.
The share price rallied nearly 5 per cent the following day on high volume.
On the fourth-quarter earnings call on Feb. 10, chief financial officer Martin Juravsky stated, “As we look at takeaways from our customer base, demand has picked up quite nicely in early 2023, and we see it across most geographies and end markets.”
Chief executive officer John Reid expanded on the strong demand that management is seeing, “So people are restocking the shelves that are out there along with end users. What we are seeing from the end-user demand, across the board, is a very steady backlog. They’re very bullish on the first half of this year. There are some impacts to inflation, higher interest rates that are impacting housing, which we don’t participate a lot in housing, residential, more non-res [non-residential] construction... Outside of that, if you’re looking at agriculture, if you’re looking across the board or in any manufacturing of equipment, all those backlogs are really, really strong. Anything to do with energy, solar, wind, oil and gas, all extremely busy right now.”
After the market closes on May 8, the company will be releasing its first-quarter 2023 financial results. The consensus revenue, EBITDA and earnings per share estimate are currently $1.18-billion, $101-million, and 94 cents, respectively.
Industry conditions
On April 20, management at two steel producers, Steel Dynamics Inc. (STLD-Q) and Nucor Corp. (NUE-N), made positive remarks during their first-quarter earnings calls.
Steel Dynamics’ chairman and chief executive officer Mark Millett: “Looking forward, customer order entry is good and backlogs are solid. March in particular was a very strong booking month for the steel platform. Auto is solid, auto production is expected to increase in 2023 over ‘22 rates and dealer inventories have improved, but still remain below historical norms. Build rate in ‘22 was some 14.3 million units and we expect ‘23 to show 15.1 per cent and a little higher in ‘24. Non-residential construction remains strong as evidenced by strong fabrication backlog and long product steel volumes. Our long products are seasonally solid from a backlogs perspective and onshoring and infrastructure spending should provide further meaningful support in the coming years. Residential construction has softened to some degree but that erosion appears to be easing a little but that segment tends to be a small part of our overall portfolio. Oil and gas activity is very strong, driving improved orders for OCTG [oil country tubular goods] and line pipe and solar continues to grow appreciably.”
Nucor’s president and chief executive officer Leon Topalian: “Three pieces of legislation, the Infrastructure Investment Act, the Inflation Reduction Act and the CHIPS Act provide a combined $975-billion of funding or tax incentives, which will have a multiplier effect on the actual amount of capital deployed. Taken together, we believe that these three programs have the potential to generate up to eight million tons of incremental steel demand per year over the balance of this decade. According to the American Iron and Steel Institute, an estimated five million tons of steel is needed for every $100-billion in infrastructure spending. On top of that, we expect IRA will drive significant investment in clean energy, adding approximately two million to three million tons of annual steel demand for wind, solar and transmission projects.”
Returning capital to its shareholders
The company pays its shareholders a quarterly dividend of 38 cents per share, or $1.52 per share annually, equating to a current dividend yield of 4.4 per cent.
Management has maintained its dividend at this level since 2014.
In the fourth-quarter, management repurchased approximately 417,000 shares.
Analysts’ recommendations
The stock has mixed recommendations – three buys and three neutral calls.
The six firms providing research on the company are: BMO Nesbitt Burns, Laurentian Bank, Raymond James, Scotiabank, Stifel Canada, and TD Cowen.
Revised recommendations
Thus far in April, one analyst has revised his expectations. Stifel’s Ian Gillies trimmed his target price by $1 to $42.
Financial forecasts
The consensus EBITDA estimates are $410-million in 2023, down from $579-million reported in 2022, and $360-million in 2024. The consensus earnings per share estimates are $3.73 in 2023, down from $5.91 reported in 2022, and $3.26 in 2024.
Earnings estimates have been rising. Three months ago, the Street was expecting EBITDA of $354-million in 2023 and $340-million in 2024. The consensus earnings per share estimates were $3.10 in 2023 and $2.97 in 2024.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 5.4 times the 2023 consensus estimate, below its five-year historical average of 6.9 times.
The average one-year target price is $39, suggesting the stock has nearly 13 per cent upside potential over the next year. Individual target prices are: $34 (from BMO’s Devin Dodge), $37, $38, $42, $44, and $45 (from Laurentian Bank’s Troy Sun).
Insider transaction activity
On March 14, director Bill O’Reilly sold 3,000 shares at price per share of $35.56, leaving 5,872 shares in this particular account. Proceeds exceeded $106,000, excluding trading fees.
Between Feb. 16 and March 3, chief financial officer Martin Juravsky exercised his options, receiving a total of 35,732 shares at an average cost per share of approximately $21.80, and sold 35,732 shares at an average price per share of roughly $35.83. Net proceeds totaled over $501,000, not including any associated transaction fees. After these transactions, this particular account held 3,188 shares.
Chart watch
Year-to-date, the share price is up 20 per cent, making it the sixth-best performing stock in the S&P/TSX industrials index, which is up 9.5 per cent.
In terms of key technical resistance and support levels, the share price is approaching major resistance around $37.50, close to its record closing high of $37.59. Looking at the downside, there is initial technical support around $30, near its 200-day moving average (at $29.88). Failing that there is strong technical support around $25.
ESG Risk Rating
According to Sustainalytics, Russel Metals has an environmental, social and governance (ESG) risk rating of 18.5 as of April 13, 2023. A rating of between 10 and 20 reflects “low” risk.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
This file should not be considered an investment recommendation.
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Jennifer Dowty