TSX Commentary

Russel Metals (RUS) – $18.23 – Upgrading to Outperform on Improving Outlook
Outperform (prev. Sector Perform), Above Average Risk, Price Target: $21.00 (prev. $19.00)
RBC CM is upgrading RUS to Outperform and raising its target price to $21. RBC CM states that positive demand/ pricing will likely drive a rerating in RUS’s multiple. RBC CM believes RUS has seen the worst of earnings in 2009. With signs of slow but sure volume pickup and more firm steel pricing, RBC CM expects that RUS will see earnings quickly recover in 2010, enough to support the $1.00 dividend. RUS ended 2009 with cash and credit available of ~$580M; RBC CM expects RUS will look to buy into volume in its US territory. Q1 is expected to show better margins as average inventory cost has bottomed out and sales pricing has improved into January. RBC CM derives its new one-year price target of $21 ($19 previously) by applying a 15x multiple (previously 13x) on its F11 EPS estimate (~1.6x 2011E book value). The 15x P/E multiple reflects RUS’s acquisition opportunities not currently factored into its estimates. With a 21% implied return to its $21 target price, RBC CM rates RUS Metals Outperform (previously Sector Perform), Above Average Risk, with the risk qualifier based on difficult earnings predictability on the back of highly volatile steel pricing.