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Taking Stock in RUS:

Russel Metals is a distribution and processing company that operates in three main business segments: metal services, energy tubular products and steel distributors. Through these three business segments Russel Metals sells a variety of products for industrial and construction applications.

Metal Service Centers:

  • Generic Products that include hot rolled & cold finished steel bars, tube & piping, stainless steel, meshes, chains & Specialty Products

Energy Tubular Products:

  • Distribute OCTG (Oil Country Tubular Goods), pipes, tubes valves & fittings to the energy and mining industry in Western Canada and the United States that are used in the construction and operation of major oil & gas companies

Steel Distributors:

  • Act as master distributors of large volume steel to other steel service centers and equipment manufacturers for large scale OEM applications

Russel Metals has its roots deep in Canadian history when in 1785 John Russel, an immigrant from Scotland, set up a business known then as John Russel & Co. In 1866 John’s great nephew Hugh began an iron trading business in Montreal and later grew into what was then an innovative steel warehousing company. By 1947 the company had regional offices in Vancouver, Winnipeg, Windsor, Toronto and Saint John with their main warehouse located in Montreal. Through 1960-2003 the company was well positioned for growth and stands as a significant operator in North America.

When you examine Russel Metal’s management structure one theme becomes immediately evident: experience. Among the top six managers of the company (excluding the Board of Directors) the cumulative number of years of experience with the company stands at 131 years. That’s an average of over 20 years experience for people in a position to make daily and long-term decisions of the company and the length of employment among senior stakeholders parallels that found at Manulife Financial. Not only do management understand the challenges of their business and industry, but they have a powerful grasp of what makes their company successful over the long-term and where it needs to go to remain competitive. Their succession planning for internal management and the ability to attract and retain talent for long periods of time adds increased stability to the operating functionality of the business.

Since 2000 ROE for the company has averaged 17.8%, book value has grown annually by 15.7% and Russel Metals has been one of the most prolific dividend growers with an average growth in their dividend of 45%.

Earnings per share for the six months of 2008 totalled 97% of full 2007 EPS with strong growth demonstrated in all major markets. The cash balance of the company stands at 1.3x long-term debt with 82% of total assets listed on the balance sheet as current assets and strong cashflow that more than adequately covers the dividend, payment of debt and operating expenses.

The company announced on February 18th of this year through a NCIB (normal course issuer bid) that they intended to buy back up to 10% of the common stock or 61 million shares that will extend to February 21st, 2009.

The company has been active on the acquisition path with the recent 100% purchase of JMS Metal Services on September 4th, 2007. JMS is a full-line distributor of steel & aluminum products with processing & distribution facilities in Alabama, Arkansas, Georgia, Kentucky & Tennessee. JMS was purchased for $125M CDN with annual sales in 2007 of $200M CDN. The company’s long-term debt sits at $175M of senior notes due March 1st, 2014 bearing interest of 6.375%.

Russel Metals holds one of the highest common dividend yields of any stock found on the TSX Composite Index at 7.2% (for a price of $25) and the company recently announced a $0.05 supplementary dividend after an excellent quarter. Management has been clear and transparent over the years in stating their intention that they intend to pay out the majority of earnings in the form of an increasing dividend. The operations of the company are strong and management continues to look for strategic acquisitions that make sense with the long-term objectives of the company.

The analysis of Russel Metals as a prospective investment isn’t a difficult task. The management of the company is strong and established, the company operates in an industry that continues to consolidate, products that remain in high demand and a strong financial position to continue acquiring key operating businesses while maintaining a high dividend.

Normally a stock with a yield over 5% immediately sparks speculation among investors of an unsustainable dividend, but when you take the time to analyze Russel Metals what becomes immediately clear to me is that the company is easy to understand, predictable in what management states and undervalued based on any metric I can utilize. As part of a balanced portfolio of equities Russel Metals provides impressive cashflow for a taxable investor and the potential for long-term capital gains at a current forward price to earnings ratio of around 9.0x.

(Disclosure: I hold equity positions in RUS & MFC)

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{ 4 comments… add one }
  • Jake September 29, 2008, 6:30 pm

    Great DD Nurse. I’ll have to look into this, it definitely has a nice yield going for it.

  • Nurse B, 911 September 29, 2008, 7:06 pm

    Thanks Jake. I've done very well on this stock for a while now as I've mentioned it more than once on my analysis of its dividend & management.

    Check out my IGM series if you like posts on due diligence: Taking Stock in IGM (4-part series)

  • George October 5, 2008, 2:02 pm

    Nice review of Russel Metals and thanks for submitting it to the Festival of Stocks. It looks like the company has good management. Does it also have any competitive advantages?

  • Nurse B, 911 October 5, 2008, 2:16 pm

    Thanks for hosting George. The company has a solid base of management which is always my starting point for looking at a company.

    They don't have any sustainable competitive advantages, but as they grow in scale it is my belief that they can achieve one. They are one of few customizable fabricators and for the O&G infrastructure being built out West in Alberta that allows them to charge a higher margin for obvious reasons.

    A tricky stock as it is more volatile in part to their business cycle and high dividend, but I put trust into their management to guide the company along the proper path and be prudent with their management of cashflows.

    I will be more than happy to add to my position @$20 if/when it drops to there.

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