The basic material sector faced challenges amid the pandemic, with restrictions hampering the operations of industries that use its products. However, several companies in this space are recovering with the reopening of industries this year, thanks to solid progress on the vaccination front. The basic material sector experienced 24.4% year-over-year growth in the third quarter of 2021.
The S&P Midcap 400 index has gained 41.2% over the past year, outperforming the 34.2% returns delivered by the benchmark S&P 500 index, which represents large-cap stocks. Given the impressive start to the third-quarter earnings season and the consequent market rally, several mid-cap stocks could become large caps in the near term.
We think fundamentally sound mid-cap basic materials stocks Reliance Steel & Aluminum Co. (RS) and Ternium S.A. (TX), which currently possess market capitalizations of more than $8 billion, have the potential to become large-cap stocks soon. So, it could be wise to bet on them now.
Reliance Steel & Aluminum Co. (RS)
With a $9.24 billion market capitalization, Los Angeles-based RS is a metal service center company that operates as a metal solutions provider. The company provides alloy, aluminum, and other specialty steel products. In addition, it offers processing services to the manufacturing, non-residential construction, transportation, aerospace and defense, electronics and semiconductor fabrication, and heavy industries.
This month, RS acquired Merfish United, a leading master distributor of tubular building products in the United States. This acquisition should broaden RS’ focus on adjacent business opportunities beyond traditional metals service centers. Also, Merfish United will increase RS’ exposure to copper and plastic products and in the adjacent industrial distribution space with a platform for further growth.
RS’ net sales for the third quarter, ended September 30, 2021, increased 84.5% year-over-year to $3.85 billion. The company’s gross profit grew 79.1% from its year-ago value to $1.21 billion. Its EPS rose 307.3% from the prior-year quarter to $6.15. Also, the company’s cash provided by operations came in at $142.2 million for the period.
Analysts expect RS’ revenue to increase 52.3% year-over-year to $13.42 billion in its fiscal year 2021. Also, the company has an impressive earnings surprise history; it surpassed the consensus EPS estimates in three of the trailing four quarters. In addition, its EPS is expected to increase 155.6% in the current year. Moreover, the stock has gained 20.7% in price over the past nine months and 32.2% over the past year.
RS’ strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.
The stock has an A grade for Growth and Momentum. We’ve also graded RS for Sentiment, Stability, Value, and Quality. Click here to access all of RS’ ratings. RS is ranked #9 of 32 stocks in the A-rated Steel industry.
Ternium S.A. (TX)
Based in Luxembourg City, Luxembourg, TX manufactures and processes various steel products in Mexico, Argentina, Bolivia, Uruguay, Brazil, the United States. The company operates through two segments—Steel; and Mining. Its segments offer galvanized products, insulated panels, pre-engineered metal building systems, pig iron products, iron ore, pellets, and various other steel products. TX has a $8.69 billion market capitalization.
In August, TX and Vale S.A. signed a memorandum to reduce CO2 emissions while developing steel products. With this decarbonization strategy, TX is well-positioned to provide low-carbon solutions to the steel industry.
For the second quarter, ended June 30, 2021, TX’s net sales increased 124.5% year-over-year to $3.92 billion. The company’s gross profit grew 534.6% from its year-ago value to $1.5 billion. Its operating income rose 1838.1% from the prior-year quarter to $1.27 billion. Also, the company’s profit for the period increased 2,556.7% year-over-year to $1.58 billion.
TX’s revenue is expected to increase 84.3% year-over-year to $16.1 billion in its fiscal year 2021. In addition, the company has an impressive earnings surprise history; it beat the consensus EPS estimates in each of the trailing four quarters. Its EPS is expected to increase by 519.5% in the current year. Over the past nine months, the stock has soared 61.8% in price, and has returned 122.5% over the past year.
TX’s POWR Ratings reflect this promising outlook. The stock has an overall A rating, which equates to a Strong Buy in our proprietary rating system. Also, the stock has an A grade for Quality and Momentum.
In addition to the POWR Rating grades I’ve just highlighted, one can see TX’s ratings for Stability, Sentiment, Growth, and Value here. TX is ranked #3 in the Steel industry.
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RS shares were trading at $144.97 per share on Thursday morning, up $0.99 (+0.69%). Year-to-date, RS has gained 22.66%, versus a 23.60% rise in the benchmark S&P 500 index during the same period.
About the Author: Priyanka Mandal
Priyanka is a passionate investment analyst and financial journalist. After earning a master's degree in economics, her interest in financial markets motivated her to begin her career in investment research.
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