Benzinga | Oct 23, 2020 02:06PM EDT

BofA Upgrades Reliance Steel On Possible FCF Deployment

Reliance Steel & Aluminum Co's (NYSE:RS) second- and third-quarter results topped expectations and the company seems poised for strong free cash flow generation going ahead, according to BofA Securities.

The Reliance Steel Analyst: Timna Tanners upgraded Reliance Steel & Aluminum from Neutral to Buy, while raising the price target from $105 to $123.

The Reliance Steel Thesis: The company has historically low leverage, which is typically followed by mergers and acquisitions, although management has indicated that share buybacks and higher dividends are also possible, Tanners said in the note.

The earnings guidance of $1.30-$1.40 per share for the fourth quarter appears conservative, despite it being a seasonally weaker period, he added.

The analyst considers Reliance Steel & Aluminum as a "defensive long in an uncertain environment," with prospects of cash deployment going ahead.

He further noted, "Results can remain resilient despite our cautious non-res construction view and energy/aero headwinds, as diverse RS end markets provide a hedge against economic/COVID-19 uncertainty."

Tanners raised the earnings estimate for 2021 from $6.55 per share to $7.30 per share to reflect higher gross margins.

RS Price Action: Shares of Reliance Steel & Aluminum had risen by 0.33% to $111.10 at the time of publication Friday.