2023-06-05 12:37:39 ET
Summary
- Ryerson Holding Corporation has outperformed the market over the past five years due to profitable growth, dividend issuance, re-shoring, and inflation.
- RYI's free cash flow generation supports its dividend policy, and it is well-positioned to benefit from the ongoing re-shoring trend.
- Ryerson stock is trading at attractive valuation levels, with a high free cash flow yield compared to the market.
The 180-year old steel fabricator, Ryerson Holding Corporation ( RYI ) has beaten the market over the last half-decade, thanks to its profitable growth, dividend issuance, re-shoring and inflation. Re-shoring and inflation are likely to continue and this will drive continued profitable growth for the business. Ryerson’s dividend policy, an extra lever in the fight to beat the market, is well-supported by its free cash flow generation. In the last five years, the firm has generated 112% of its market cap in free cash flow! The firm is trading at attractive relative multiples, and has a free cash flow yield of 21%.
A Market Beater
In the last five years, Ryerson’s share price has grown by over 238%, while the Fineco AM MSCI World Metals And Mining UCITS ETF (FAMAMW), which tracks the MSCI World Metals and Mining Index, and serves as a proxy for Ryan’s industry, grew by nearly 11.5%, while the S&P 500 grew by nearly 58%. Over that time, the firm’s total shareholder return (TSR) was nearly 250%.
A History of Profitability
Gross profitability, which scales gross profits by total assets, has risen from 0.41 in 2019 to 0.48 in the TTM period. This is well above the 0.33 threshold that research shows is a marker of attractiveness. The firm’s operating income rose from $210.8 million in 2019 to $413.9 million in the TTM period, compounding at 14.45%. The firm’s net income has risen from $82.4 million in 2019 to $247.7 million in the TTM period, compounding at 27.23% a year. This is far above the mean and median 5-year earnings CAGR enjoyed by firms in the 1950 to 2015 period, of 7.3% and 5.9% respectively, according to data from Credit Suisse . In that time, returns on invested capital ((ROIC)) have risen from 8.2% in 2019 to 17.8% in the TTM period. This is higher than the mean ROIC of the 2000 largest firms in the United States, which was 9.3%, according to New Construct’s calculations .
Source: Ryerson Holding Corporation Filings and Author Calculations
Free Cash Flow Supports Dividend Policy
Investors should do their due diligence when it comes to dividend payments, because those payments have to be supported by the free cash flows ((FCF)) that the business generates. Ryerson’s FCF generation certainly supports the firm’s growing dividend payments. In the last five years, FCF has grown from $218 million in 2018 to $$392 million in the trailing twelve months ((TTM)), compounding at 12.45% a year and amounting to $1.41 billion in FCF, or 112% of Ryerson’s market capitalization. Ryerson began paying out a dividend in 2021, and since then, dividends per share have grown from $0.085 per share in 4Q21 to $0.18 per share in 2Q23, compounding at over 9.8% a quarter. In total, dividends have grown from $6.4 million in 2021 to $22.1 million in the TTM period, amounting to $48.4 million. Share repurchases resumed in 2021, having stopped in 2016, and have grown from $1.8 million in 2021 to $102.7 million in the TTM period, compounding at nearly 285% a year, and amounting to $154.4 million. Thus, in the last five years, Ryerson has earned far more in FCF than it has paid out in dividends or used to repurchase its shares.
Source: Ryerson Holding Corporation Filings and Author Calculations
Reshoring Benefits Ryerson
Russia’s invasion of Ukraine brought geopolitical risk to the fore for both investors and managers. A greater theme, however, has been the new cold war that has arisen between the United States and China since the Trump Administration. This new cold war has increased the risks of Western firms relying on supply in China and other potentially hostile partners, and so businesses from different industries have begun a process of reshoring their supply to Mexico, the United States and Canada. The need for reshoring was deepened by the pandemic , which made everyone realize the benefits of having sources of supply nearer to home, regardless of the geopolitical dynamics between nations. That process is ongoing and unstoppable, even if de-globalization itself is not. According to CNBC , mentions of “re-shoring” in the earnings transcripts of S&P 500 firms increased by 128% in 1Q23, far more than “AI”. Re-shoring is important, not just for firms on our side of the planet, but as a way of de-risking from Europe, with its energy crisis, from Asia, with its critical components shortage, and these risks make North America appear much more attractive.
Given that, in terms of sales, Ryerson is one of the largest value-add processors and distributors of industrial metals in North America, the company is well poised to benefit from this process of re-shoring.
Source: Ryerson’s Bank of America Global Metals, Mining & Steel Conference Investor Presentation May 2023
Input Shortages are Driving Revenue Growth
In the last few years, especially since the pandemic, the world has suffered from supply chain disruptions and shortages and security challenges that have led to key input prices such as those of electricity, labor, hot rolled coil (HRC) steel, aluminum, and nickel rising. Those shortages have eased somewhat, and with that, prices have declined, but they remain elevated from a historical perspective and the process of re-shoring means arriving at robust supply chains will not happen for some time. Indeed, from the long-view, commodity prices have tended to rise over time, with the effect that Ryerson’s products have tended to see price rises over time.
Supply chain problems have led to Ryerson’s revenue rising from $4.5 billion in 2019 to $5.98 billion in the TTM period, compounding at 5.85% a year.
Valuation
Ryerson has a price/earnings (P/E) multiple of 4.68 compared to 24.2 for the S&P 500. In addition, we have shown that the firm is attractive, with a gross profitability of 0.48 compared to the threshold of 0.33. FCF yield is a stronger screen than traditional P/E multiples, and in this case, Ryerson has an FCF yield of 21% compared to the mean FCF yield of 2.7%, of the 2000 largest firms in the United States, as calculated by New Constructs .
Conclusion
Ryerson has beaten the market over the last five years, thanks to its growth, profitability, dividend issuance, and inflation. Going forward, growth is likely thanks to re-shoring, and continued inflation. The firm’s dividend issuance is supportable and provides investors with an extra lever to battle the market. Ryerson is trading at an attractive level, with FCF available at a cheap price compared to the market.
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Reinforce Your Portfolio With Ryerson