RYI – Ryerson Holding: Solid Company With Solid Results

Investment Summary

Ryerson Holding Corporation (NYSE:RYI) is a prominent metal processing and distribution company in North America. Renowned for its expertise in the metal industry, Ryerson provides a wide selection of high-quality metal products, encompassing carbon and stainless steel, aluminum, and specialty alloys.

The company had a solid QoQ growth to the start of the first quarter of 2023. The challenges the market environment presented didn’t seem to affect RYI too hard. The company may have seen a yearly decline in revenues, but only a very slim shipment decrease of 1.7%. The less favorable commodity prices are the main driver behind this decrease. But as the outlook remains strong, and the demand is there for the products that RYI offers, I see them going forward as a solid option to gain exposure to the US infrastructure demand we are expected to see. The company generates solid cash flows and is using that to provide value to shareholders through buybacks. RYI is a buy for me.

Reshoring Manufacturing To The US

Reshoring and establishing manufacturing once again in the US should in my opinion be a main driver for growth and demand for a company like RYI. As more and more companies want to reduce the travel distance supplies need, entering into partnerships with manufacturers already established in the US makes sense. Steel in the US seems to be heading in the right direction, with demand from the automotive sector playing a big role, for example.

Businesses are relocating their production from China to other countries such as India or Vietnam. Additionally, companies are also reshoring their operations to the United States as a strategic move to mitigate global uncertainties observed during the pandemic. This shift aims to establish a more streamlined and efficient business model capable of navigating challenging times. Moreover, proximity to the domestic market becomes a significant advantage, leading to an increased demand for local businesses. Encouraged by government incentives to bolster manufacturing within the country, this transition is gaining momentum. Steel production in the United States has witnessed a steady increase throughout 2022, with December alone experiencing a notable 5% rise compared to November’s production levels.

Some notes from the last report shed some light on the environment that was the first quarter, CEO Eddie Lehner said the following, “Ryerson produced good operating results during a period of better-than-expected composite demand and price support. We generated positive operating cash flow, exceeded our expectations on earnings per share, increased our quarterly dividend, and maintained our net leverage ratio at the low end of our target range”. Going forward, they expect to see some slight price increases and shipments to remain flat. I don’t see a catalyst that would see the company have drastic shipments increase YoY, but instead see long steady growths like this as commodity prices steadily climb upwards.

Quarterly Result

Looking at the last report, the company saw a YoY decline as mentioned before in terms of revenues. Which to be fair was expected as commodity prices were much less favorable than the year prior. What I think the quarter highlighted was the resilience of the business and its capabilities to still managed to generate value for shareholders through dividends.

The company raised the dividend by 5.9% QoQ as RYI continued to generate strong cash flows to help support it.

The quarter also saw the company repurchase 1.5 million shares and raise the repurchase program by $80-$100 million until April 2025. Moves like this help reassure the long-term prospects of an investment in the company. In times of less favorable commodity prices, like now, investors are still able to gain value through both dividends and buybacks. With the company perhaps lacking the growth of other companies, paying a 9x p/e for investor value like this is not too bad. Being able to grow through tough times is impressive.

Looking ahead, the company sees shipments remaining relatively flat and net sales to come in around $1.4-$1.44 billion, a slight QoQ increase. With that said, the EPS is also expected to see a 7% QoQ if they succeed with their upper-end guidance. Keeping note of commodity prices will perhaps be less important, as they are prone to go in cycles. Looking at margins for the business will be more important, and RYI is heading in the right direction with the bottom line as seen here.

Financials

Looking at the financials of the company, they remain solid, with the company continuing to increase its cash position. Noteworthy is that RYI is also increasing the cash position faster than the total debt, percentage-wise at least.

Long-term debts sitting at just under $400 million seem manageable, given RYI is generating above $300 million levered FCF already in the TTM. Now, that is FCF with the 2022 numbers, where of course the commodity prices were significantly higher. But using the first quarter numbers, RYI would land around $200 million in FCF for 2023, which could be used to pay off half the debts. A strong financial position like this makes the company much more able to make strategic acquisitions, like acquiring BLP Holdings.

The net debt/EBITDA ratio sits quite low right now at just 1.28, which further highlights the strength of the balance sheet and the little worry I have going forward of debt becoming an issue and causing a cut in the dividend or slowdown or the buybacks.

Risks

Perhaps one of the more prominent risks I see going into the coming quarters is a share compression if there is a clear trend of the margins decreasing. The company did see a QoQ increase in the last report, but a yearly decline that was quite worrying. Not it should be said that the price of commodities are not where it used to be a year ago, which certainly helps make it harder to grow on a yearly basis. But going forward, I think a failure in growing margins on a quarterly basis is the biggest concern. As the company doesn’t have super strong buyback history, growth is what needs to prop up the valuation here in my opinion and help with EPS growth.

Valuation & Wrap-Up

RYI is a solid play for investors seeking exposure to American make metals. The company itself notes the tailwinds that deglobalization will bring as manufacturers in the US will buy from American companies rather the foreign ones to help bring down the traveling distances.

The first quarter might have looked back compared to the year prior, but I think the big picture tells a different story. The demand for metals remains strong and should help RYI generate strong cash flows, which translate into raised dividends and increase buyback budgets. I think the value investors can get here is quite strong, and I am rating it a buy. Looking at the next quarter, margins will be key to look at as they will help tell the story of how FCF could look in a less strong pricing environment with metals. The company sells mostly domestically and sees 45-50 million tonnes of steel required over the next 5 years, bolstering the outlook for the RYI and making revenue growth highly likely, in my view.