Executive Summary / Key Takeaways

• Core Thesis: Reliance, Inc. is executing a "smart, profitable growth" strategy that delivered record tons sold and 290 basis points of U.S. market share gains in 2025, but this volume outperformance has come at the cost of short-term gross margin compression due to trade policy uncertainty and inventory overhangs in high-value aerospace and semiconductor markets.

• Key Development: Third-quarter 2025 tons sold increased 6.2% year-over-year while the Metals Service Center Institute (MSCI) industry average declined 2.9%, pushing RS's U.S. market share to 17.1% from 14.5% in 2023—a nine percentage point outperformance that management attributes to superior customer service, next-day delivery capabilities, and expanded value-added processing.

• Critical Risk: Gross profit margin compressed to 29.0% in Q3 2025 from 30.6% in Q2, driven by an extremely competitive pricing environment where mill price increases could not be fully passed through to customers, plus meaningful profit pressure from aerospace and semiconductor supply chains working through excess inventories that represent less than 10% of sales but disproportionately impact margins.

• Financial Resilience: With 66 consecutive years of quarterly dividends, a net debt-to-EBITDA ratio below 1.0, and $1.5 billion in revolving credit capacity, RS maintains the balance sheet strength to fund opportunistic acquisitions, invest in growth initiatives, and return capital through buybacks even as working capital investments temporarily reduced nine-month operating cash flow to $555 million from $956 million in the prior year.

• Outlook Catalyst: Management believes gross margin troughed in Q3 2025 and expects pressure to ease through 2026 as aerospace and semiconductor inventories normalize, with the company currently in the "seventh or eighth inning" of its destocking while competitors remain in the "fifth or sixth inning," positioning RS to benefit first from restocking demand.

Setting the Scene: The Largest Metal Solutions Provider in a Fragmented Market

Reliance, Inc., founded in 1939 and headquartered in Los Angeles, operates as the largest diversified metal solutions provider in North America, with 315 service center locations processing approximately 50% of orders through value-added services. The company sits at a critical node in the industrial supply chain, purchasing metal from domestic mills—95-96% U.S.-sourced—and transforming it into precisely cut, shaped, and finished components for original equipment manufacturers across construction, manufacturing, aerospace, and energy markets. This positioning makes RS a pure-play beneficiary of reshoring trends and infrastructure investment while insulating it from direct import competition that pressures smaller peers.

The metals service center industry remains highly fragmented, with hundreds of regional players competing on price, delivery speed, and processing capabilities. RS's scale creates a self-reinforcing advantage: its $13.8 billion in annual revenue enables bulk purchasing terms with mills, while its national footprint allows next-day delivery to most customers—a logistical feat smaller competitors cannot match profitably. In the current environment, this scale advantage has become more pronounced. Trade policy uncertainty and tariff implementation in early 2025 created a "uniquely challenging" market where buyers hesitated to build inventory, instead placing smaller, more frequent orders that play directly into RS's operational model of just-in-time delivery and high-touch customer service.

The company's end-market diversification provides additional resilience. Non-residential construction represents roughly one-third of sales, with particular strength in data center builds and public infrastructure projects like schools, hospitals, and airports. General manufacturing accounts for another third, spanning military machinery, consumer products, shipbuilding, and rail. Aerospace contributes 9% of sales with high-value specialty products, while automotive toll processing adds 4%. This mix prevents any single sector's downturn from derailing overall performance—a protection that proved valuable when aerospace and semiconductor markets weakened in 2025.

Technology, Products, and Strategic Differentiation: The "Smart, Profitable Growth" Moat

RS's competitive moat rests on three pillars: an extensive distribution network, a diversified product portfolio spanning approximately 100,000 SKUs, and advanced processing capabilities that transform commodity metal into customized components. The company's "smart, profitable growth" strategy explicitly aims to increase tons sold while maintaining gross profit margins within a sustainable 29-31% annual range—a discipline that requires rejecting low-margin volume to protect profitability. This approach demonstrates management's focus on economic value creation rather than market share for its own sake, a distinction that becomes critical during cyclical downturns when competitors slash prices to move inventory.

Value-added processing represents the core of RS's differentiation. In 2024, the company performed processing services on roughly half of its orders, activities that include cutting, machining, welding, and specialty finishing. These services command higher margins than commodity distribution and create switching costs, as customers embed RS's capabilities into their own production processes. The 2024 acquisitions of Cooksey Iron Metal, American Alloy Steel, Mid-West Materials, and FerrouSouth assets—collectively adding $400 million in annualized sales—expanded these processing capabilities while enhancing geographic reach. Management emphasizes that the acquisition strategy targets companies where RS can leverage its scale to improve operations, not simply bulk up revenue.

The product mix further insulates RS from volatility. Carbon steel represents the majority of gross sales, making the company sensitive to steel price cycles, but aluminum, stainless steel, alloy, copper, and brass collectively contribute nearly 40% of revenue. Different metals experience divergent pricing cycles. In Q3 2025, while carbon steel prices declined, certain aluminum and stainless products saw price increases, partially offsetting margin pressure. Competitors like Ryerson and Olympic Steel , with more concentrated carbon steel exposure, faced greater profitability headwinds, reporting gross margins of 17-18% compared to RS's 29%.

Customer service excellence provides the final moat element. RS's decentralized structure empowers local managers to respond quickly to market opportunities, while its next-day delivery model and quality assurance programs build loyalty. In uncertain markets, customers gravitate toward reliable suppliers who can source metal domestically and deliver on tight timelines. This dynamic explains how RS gained market share across nearly every product group in 2025, with management attributing wins to "superior customer service" rather than price competition—a crucial distinction that preserves margin potential when conditions normalize.

Financial Performance & Segment Dynamics: Volume Triumphs Over Price

Third-quarter 2025 results illustrate the tension between volume growth and margin compression. Net sales of $3.65 billion increased 6.8% year-over-year, driven entirely by a 6.2% increase in tons sold and a modest improvement in average selling price. Operating income declined 5% to $259.8 million, however, as gross profit margin compressed 1.1 percentage points year-over-year to 29.0% and same-store SG&A expense rose 5.1% due to inflationary wage adjustments and higher variable warehousing costs associated with increased volume. This performance shows RS can grow revenue even in a declining price environment, but profitability suffers when pricing power weakens.

The margin compression stems from two distinct pressures. First, trade policy uncertainty created an "extremely competitive market" where domestic mills held readily available inventory, making it difficult for service centers to pass through price increases. Carbon steel products, representing the majority of sales, experienced the most significant margin decline as pricing peaked in April then fell through Q3. Second, aerospace and semiconductor markets—typically high-margin contributors—underperformed due to excess inventories built during prior periods of extended lead times. Management estimates these specialty products, representing less than 10% of sales, contributed meaningfully to consolidated margin compression.

Despite these headwinds, RS demonstrated remarkable operating leverage. Same-store SG&A expense per ton declined approximately 5% in the first quarter and remained controlled through Q3, as volume growth spread fixed costs over more tons. CFO Arthur Ajemyan noted that the incremental 100,000 tons sold in Q3 and over 300,000 tons year-to-date "meaningfully contributed to overall profitability," even as margins compressed. Capturing market share during downturns improves long-term positioning, and when margins recover, the additional volume will drive disproportionate profit expansion.

Cash flow dynamics reflect the working capital intensity of growth. Nine-month operating cash flow of $555.3 million fell $401.2 million from the prior year, primarily due to a $366.7 million increase in working capital investment required by rising metal prices and higher volumes. This contrasts with 2024's declining price environment, which freed up working capital. While the reduction appears concerning, it represents a strategic investment in growth that should generate returns as inventory turns and receivables convert to cash. The company's leverage position remains favorable with net debt-to-EBITDA below 1.0, and the August 2025 $400 million term loan refinancing demonstrates continued access to attractively priced capital.

Capital allocation reflects disciplined priorities. In 2024, RS invested $430 million in capex, $365 million in acquisitions, a record $1.1 billion in share repurchases (reducing shares outstanding 6%), and paid $250 million in dividends. In 2025, acquisition spending paused while management integrated prior deals, and capex declined $64 million year-over-year to $255.7 million. This shows RS can modulate investment based on opportunity, conserving cash during periods of uncertainty while maintaining the flexibility to pursue growth when conditions improve.

Outlook, Management Guidance, and Execution Risk

Management's Q4 2025 guidance suggests margin pressure has peaked. The company anticipates tons sold will increase 3.5-5.5% year-over-year but decline 5-7% sequentially due to normal seasonality, with average selling prices remaining relatively flat. This implies FIFO gross profit margin will be "flat to slightly improved" from Q3's 29% level. The guidance range for non-GAAP earnings per diluted share of $2.65-$2.85 includes $25 million of LIFO expense ($0.35 per share) and reflects typical Q4 seasonality where earnings decline 20-25% from Q3. This outlook signals management believes the worst of margin compression is behind the company, setting up potential earnings upside if pricing discipline returns.

The aerospace and semiconductor inventory overhang provides both risk and opportunity. CEO Karla Lewis noted RS is "probably in the seventh or eighth inning" of getting its own aerospace inventory under control, while the broader industry remains in the "fifth and sixth inning." This suggests RS will be positioned to restock in Q1 2026 before competitors, capturing early demand when these high-margin markets recover. The timeline aligns with management's expectation that margin pressure will "ease as we move through 2026," though the exact pace depends on how quickly supply chains normalize.

Trade policy uncertainty remains the wildcard. The tariffs imposed in early 2025 initially supported higher selling prices, but the lack of underlying demand meant these increases were unsustainable. Management described the environment as "a little atypical from our normal cycle," with supplier lead times shortening and customers holding back purchases. If trade policy stabilizes, RS's ability to pass through mill increases should normalize, supporting margin recovery. However, continued uncertainty could extend the competitive pricing environment, pressuring margins longer than anticipated.

Execution risk centers on maintaining service quality while scaling. The 2024 acquisitions added complexity, and management is focused on integration and leveraging "increased value-added processing capabilities" across the network. The decentralized model that enables market share gains also requires strong central coordination to ensure best practices spread efficiently. Any deterioration in customer service quality could undermine the very advantage that drove recent outperformance.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is that trade policy uncertainty persists longer than expected, keeping the pricing environment "extremely competitive" and preventing margin recovery. If customers continue hesitating to build inventory and mills maintain high availability, RS may be forced to choose between volume growth and margin preservation. The company's Q3 decision to prioritize market share over margin suggests management would accept further compression, which could pressure earnings even as volumes grow.

Aerospace and semiconductor destocking could extend beyond 2026. These markets built 50-80 week lead times during supply chain disruptions, leading to "general overbuying" that will take time to work off. If inventory clearance drags into late 2026 or 2027, the high-margin contribution from these products would remain depressed, making it harder for RS to achieve its 29-31% sustainable margin target. The risk is amplified because these products represent a small portion of sales but a disproportionate share of profit contribution.

The recently announced merger between Ryerson and Olympic Steel creates a combined entity with over $6 billion in annual revenue, potentially challenging RS's scale advantage. While the merged company will still be smaller than RS, synergies could improve its cost structure and pricing discipline, intensifying competition in core carbon steel markets. If the combined entity uses its enhanced scale to pressure suppliers or undercut prices, RS's market share gains could reverse.

On the positive side, reshoring trends and infrastructure investment provide meaningful upside. Data center construction, electrification projects, and public infrastructure spending create sustained demand for RS's products. If these trends accelerate, volume growth could exceed management's mid-single-digit expectations, driving operating leverage that more than offsets current margin pressure. The company's domestic sourcing strategy positions it as a preferred supplier for customers seeking to reduce supply chain risk, potentially supporting premium pricing.

Valuation Context: Premium for Quality in a Cyclical Industry

At $288.01 per share, RS trades at 20.24 times trailing earnings and 12.79 times EV/EBITDA, with a price-to-operating cash flow ratio of 14.73 and a dividend yield of 1.72%. These multiples represent a premium to smaller service center peers but a discount to integrated steel producers like Steel Dynamics (STLD) and Nucor (NUE), which trade at 22.7x and 22.6x earnings, respectively. The valuation reflects the market's recognition of RS's superior diversification, processing capabilities, and financial stability relative to pure-play distributors.

Comparing RS to direct competitors highlights its quality premium. Ryerson (RYI) trades at just 0.98 times book value with negative profit margins and a 118.65% payout ratio, signaling financial distress. Olympic Steel (ZEUS) trades at 0.78 times book with 0.73% profit margins and 32.67x earnings, reflecting its smaller scale and limited diversification. RS's 2.07 price-to-book ratio, 5.23% profit margin, and 34.18% payout ratio demonstrate superior profitability and capital management. The market assigns RS a valuation that acknowledges its ability to generate consistent returns through cycles while maintaining the flexibility to invest in growth.

The company's balance sheet strength supports the valuation. With a debt-to-equity ratio of 0.23, current ratio of 4.43, and quick ratio of 1.97, RS maintains ample liquidity to weather downturns and capitalize on opportunities. The net debt-to-EBITDA ratio below 1.0 compares favorably to RYI's 1.09 and ZEUS's 0.49, giving RS more capacity for acquisitions or share repurchases. This financial flexibility justifies a valuation premium, as it reduces downside risk and enhances optionality.

From a cash flow perspective, RS's 22.88 price-to-free-cash-flow ratio appears reasonable given the company's ability to generate $999 million in annual free cash flow while investing in growth. The temporary working capital build in 2025 should reverse as inventory turns normalize, potentially driving free cash flow higher in 2026. Management's disciplined approach to capital allocation—balancing growth investments with shareholder returns—supports a valuation that reflects both current earnings power and future optionality.

Conclusion: Execution Premium Justified by Market Share Gains

Reliance, Inc. has demonstrated that scale, diversification, and operational excellence can drive market share gains even in the most challenging pricing environments. The company's 290 basis point increase in U.S. market share during 2025 validates its "smart, profitable growth" strategy and underscores the durability of its competitive moat. While gross margin compression from trade policy uncertainty and aerospace inventory overhangs has pressured near-term profitability, management's guidance suggests the trough is behind the company, with recovery expected through 2026.

The key variables for investors to monitor are the pace of aerospace and semiconductor destocking, resolution of trade policy uncertainty, and integration of the 2024 acquisitions. If RS can maintain its volume outperformance while margins normalize, the operating leverage inherent in its model should drive earnings growth well above revenue increases. The company's 66-year dividend history and fortress balance sheet provide downside protection, while its processing capabilities and domestic sourcing position it to benefit from reshoring trends.

The stock's premium valuation reflects these advantages, trading at higher multiples than distressed peers but lower than integrated producers. For long-term investors, RS represents a high-quality cyclical compounder that can gain share during downturns and expand margins during recoveries. The critical question is whether management can sustain its execution edge as the competitive landscape evolves, particularly with the RYI-ZEUS merger creating a more formidable rival. If RS continues delivering industry-leading customer service and operational efficiency, the current margin pressure will prove temporary, and the market share gains will translate into superior returns when conditions normalize.