Stock You’ve Never Heard Of, Sort of Doing What Amazon Does, and Cheap-ish

An investment theme worth owning for years to come is efficient logistics. Getting component A into part B for assembly into end product C or delivering product X to retail customer Y can produce steady investment returns for little known companies in every link of the industrial supply chain.

Amazon (AMZN), the best known supply chain magician, carries a price/earnings ratio in the stratosphere. Take away the glitz and you’ll find logistics companies like Reliance Steel and Aluminum (RS). The company’s proposed acquisition of industry rival Metals USA (MUSA) at a generous premium to its pre-announcement market price confirms the merit of the logistics story in a recovering economy.

Reliance, based in Los Angeles, is the largest publicly traded company in the American metal service center business. Metal service centers distribute steel, aluminum and other industrial metals to buyers in industries ranging from aerospace to homebuilders. The industry is a pioneer in just-in-time inventory management systems. Profit margins at steel service centers generally exceed steel producers.

RS Profit Margin TTM Chart

RS Profit Margin TTM data by YCharts

Reliance revenues in 2011 totaled $8.1 billion. The Metals USA purchase would push annual sales at Reliance to more than $10 billion.

Reliance has been growing through acquisitions since the mid- 1990s. Metals USA would be its largest single acquisition but would take the company to only about a 7% share of total sales by U.S. metal service centers. The industry remains highly fragmented, with many privately held companies operating from one or just a few warehouses. The company’s biggest competitor in North America, Germany’s Kloeckner, completed a major U.S. acquisition last year but is mired in a weak European economy and probably is sidelined from making additional acquisitions for at least another year.

RS Total Assets Chart

RS Total Assets data by YCharts

Reliance agreed on Wednesday to pay $1.2 billion, or $20.65 a share, for Metals USA, a 13% premium over the market price. Reliance shares advanced 8.6% on the news, after the company said the deal would immediately boost earnings after its closes in the second quarter.

Michelle Applebaum, a veteran steel industry watcher at Steel Market Intelligence, says the deal will focus attention on other public service center companies that might be acquisition targets, such as A.M. Castle (CAS), which rose 2.7% on the news, and Olympic Steel (ZEUS), up 3.7%, as seen in a stock chart.

RS Chart

RS data by YCharts

Reliance CEO David Hannah told a conference call Wednesday, “our industry tends to be somewhat invisible. There are a lot of opportunities out there.” With steel production and prices rebounding worldwide and industrial optimism improving in the U.S., a renewed consolidation phase among U.S. steel distributors likely will be part of this year’s merger-and-acquisition story.

Bill Barnhart, a contributing editor at YCharts, is a 36-year veteran of business reporting. Most recently he was the financial columnist for the Chicago Tribune, where he offered daily commentary on financial markets. He is a past president of the Society of American Business Editors and Writers. He can be reached at editor@ycharts.com.

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