2011 may require infinite patience for service centers

Dec 01, 2010 | 04:08 AM | Corinna Petry

Credit availability remains tight and more deals than ever are cash-and-carry. Acquisitions need to be as close to no-risk as possible and growth needs to be held closer to a realistic overall economic approach. And service centers' optimism is curbed by their need to avoid speculation on prices and volumes.

The upcoming year, service center operators say, won't bring them back to pre-recession sales and earnings, but it will be incrementally stronger than 2010 and propel them more than halfway out of the crushing contraction of 2009.

Service centers learned fast how to cut inventory, keep it trimmed, and conserve cash—especially because banks were particularly unfriendly to the industrial community at large—and are already using that cash to control their destinies.

A.M. Castle & Co., Russel Metals Inc. and Olympic Steel Inc. all forecast that market conditions and demand for their products will improve significantly throughout the new year, although unevenness is likely to persist due to seasonal factors, the monthly rise and fall of scrap pricing and the short-term visibility offered by their customers.

In their never-ending battle to protect inventory values, service center leaders expect to avoid speculating on price or volume, but they will invest cash—and even incur a modest amount of debt—for expansion, whether through acquisitions or in building new facilities. For companies that are perennially looking for growth, they will seek ways to expand their footprint, widen their product lines or add services.

On the acquisition front, however, the process has moved somewhat slowly. "We have a couple of targets we looked at, but we haven't come to any price agreements," Russel Metals president and chief executive officer Brian Hedges told shareholders late in 2010. "It's not whether they (sellers) will get six times or seven times earnings, but (a question of) what is normalized Ebit (earnings before interest and taxes). The valuation gap has narrowed, but what we'll pay has narrowed, too. If a smaller company went from $10 million to $20 million and then back to $8 million in profits, those are the numbers you're dealing with. What's normalized? The $10 million or the $8 million?" Hedges cited one company that was sold to someone else willing to pay more. "The gap was huge between what the seller wanted and what Russel wanted to pay," he said. "You can take a good asset and turn it into a bad asset by paying too much for it."....

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