Russel Metals (Symbol-RUS)

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Post by Peculiar_Investor »

Does anyone have a view on the recently issued Russell Metals 7.75% convertible debentures that will mature on Sept 30, 2016. The common stock is yielding 5.9%, so one could pick up some yield purchasing the debentures at $103.00.
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Post by zinfit »

Thanks for the info on the convertible preferred. When does the conversion option expire?
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Post by Mike Schimek »

Does anyone have a view on the recently issued Russell Metals 7.75% convertible debentures that will mature on Sept 30, 2016. The common stock is yielding 5.9%, so one could pick up some yield purchasing the debentures at $103.00.
* Well if things recover it looks like Russel might go back to 25-30 per share, while the debentures stay flat, so in that scenario the common is a better deal.
* If we have high inflation at some point, Russel common might still do alright; my understanding is that in times of high inflation stocks still do well. The debentures probably wouldn't do so well as high interest rates would drive down their value.
* In a hyper inflation scenario, the value of the debentures could be decimated while the common does alright.
* If things stay exactly as they are now, with Russel metals profitability staying the same for the next 6 years with no improvement whatsoever despite their best efforts, then I guess the debentures would be a better deal by about 0.5% per year. (Russel forward P/E of 13.61 equates to a 7.29% return on invested money, 5.9% of which is paid out in dividends while the remainder is left in the company and reinvested by the company)

I'm not too sure in what scenario the debentures come out a winner. The latter one seems pretty nominal. Maybe in a deflationary scenario.

Is the interest on the debentures or the common treated differently for tax purposes? There might be an important angle there.
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Post by scomac »

Mike Schimek wrote:
* Well if things recover it looks like Russel might go back to 25-30 per share, while the debentures stay flat, so in that scenario the common is a better deal.
* If we have high inflation at some point, Russel common might still do alright; my understanding is that in times of high inflation stocks still do well. The debentures probably wouldn't do so well as high interest rates would drive down their value.
* In a hyper inflation scenario, the value of the debentures could be decimated while the common does alright.
* If things stay exactly as they are now, with Russel metals profitability staying the same for the next 6 years with no improvement whatsoever despite their best efforts, then I guess the debentures would be a better deal by about 0.5% per year. (Russel forward P/E of 13.61 equates to a 7.29% return on invested money, 5.9% of which is paid out in dividends while the remainder is left in the company and reinvested by the company)
Now that you've thoroughly discredited these debentures, you can explain why the Royal Host debentures that you own are such a wonderful investment. :?
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Post by Mike Schimek »

Now that you've thoroughly discredited these debentures, you can explain why the Royal Host debentures that you own are such a wonderful investment.
- Hm, I think I'm trying to bring a different perspective and way of looking at the Russel metal debentures vs common stock... I don't think the debentures are bad; they are backed by a solid company with a solid balance sheet; I just think the debentures might not be as good as the common stock if the above mentioned points make sense.

- Russel Metals seems like a well managed company with a good balance sheet, so the danger of losing the investment seems minimal, whether it be in debentures or common stock.


The Royal Host debentures yield 15 to 16% because of the risk premium :shock:

The risk premium seems exaggerated and my spreadsheet says I should be buying these hand over fist!
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Post by scomac »

I would argue that the Russel debentures offer just as much up-side for the risk being assumed as the common stock.

*If we assume an up-side on the commons of $30 at maturity, then the PV of the debentures would be $83.42

*Based on yield differential, the put option has a PV of $15.38

*Therefore, the debentures have a net PV of $98.80
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Post by Peculiar_Investor »

scomac wrote:I would argue that the Russel debentures offer just as much up-side for the risk being assumed as the common stock.

*If we assume an up-side on the commons of $30 at maturity, then the PV of the debentures would be $83.42

*Based on yield differential, the put option has a PV of $15.38

*Therefore, the debentures have a net PV of $98.80
If it would please the teacher, this student who is trying to learn the ins and outs of fixed income investing (including pref. shares and debentures) would appreciate to understand the math behind the above.
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Post by scomac »

scomac wrote: *If we assume an up-side on the commons of $30 at maturity, then the PV of the debentures would be $83.42
1st calculate a TVM for RUS with a PV of $16.86, $.25/qtr dividend and a FV of $30 at the maturity date of the debentures. Solve for I/YR which yields 12.941%. Using the conversion ratio of 3.883 calculate a TVM for the debentures using a FV of $116.505 at maturity, $3.875 sa interest, I/YR of 12.941% and solve for PV of $83.42.

Calculator, tutorial and equations for TVM
*Based on yield differential, the put option has a PV of $15.38
At issue the debentures yield 7.75% vs. 5.9% for the common. To achieve the same current yield on the commons as the debentures divided $1 dividend by 7.75% which equals $12.90. That's a differential of $3.96 per share multiplied by the conversion ratio of 3.883 gives a yield advantage of $15.38 per debenture.

$1/.0775=$12.90
$16.86-$12.90=$3.96
$3.96X3.883=$15.38

*Therefore, the debentures have a net PV of $98.80
The debenture comes with an implied put option (as well as the explicit call option) the value of which to the common shareholder can be assigned this differential which would ultimately be added back into the fair value pricing of the debenture.

$83.42+$15.38=$98.80

*NB this is just a home grown back-of-the-envelope method of determining relative valuations between a convertible debenture and its respective common share.

[Added] Edited to provide equations
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Post by Peculiar_Investor »

scomac wrote:
scomac wrote: *If we assume an up-side on the commons of $30 at maturity, then the PV of the debentures would be $83.42
1st calculate a TVM for RUS with a PV of $16.86, $.25/qtr dividend and a FV of $30 at the maturity date of the debentures. Solve for I/YR which yields 12.941%. Using the conversion ratio of 3.883 calculate a TVM for the debentures using a FV of $116.505 at maturity, $3.875 sa interest, I/YR of 12.941% and solve for PV of $83.42.

Calculator, tutorial and equations for TVM
*Based on yield differential, the put option has a PV of $15.38
At issue the debentures yield 7.75% vs. 5.9% for the common. To achieve the same current yield on the commons as the debentures divided $1 dividend by 7.75% which equals $12.90. That's a differential of $3.96 per share multiplied by the conversion ratio of 3.883 gives a yield advantage of $15.38 per debenture.

$1/.0775=$12.90
$16.86-$12.90=$3.96
$3.96X3.883=$15.38

*Therefore, the debentures have a net PV of $98.80
The debenture comes with an implied put option (as well as the explicit call option) the value of which to the common shareholder can be assigned this differential which would ultimately be added back into the fair value pricing of the debenture.

$83.42+$15.38=$98.80

*NB this is just a home grown back-of-the-envelope method of determining relative valuations between a convertible debenture and its respective common share.

[Added] Edited to provide equations
Mega thank you. Now I need to study and learn from the example. I'll try and bring an apple to class tomorrow.
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Post by Mike Schimek »

Looks like Scomac has a good approach. His approach seems more analytical while mine is more about "what if x happens" scenarios.

It looks like the convertibility option included in the debentures, which I hadn't considered, allows the debenture holders to participate in the upside scenario, which Scomac's analysis shows and which makes the debentures much more appealing than I would have thought.
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Post by zinfit »

The conversion price is $25 and is good to the redempton date of 2016. So a person is being paid 7% to wait .
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Post by Peculiar_Investor »

zinfit wrote:The conversion price is $25 and is good to the redempton date of 2016. So a person is being paid 7% to wait .
The conversion price is $25.75 from the prospectus and the interest payment is 7.75%. When I looked the ask price was $103, which means the yield to maturity is closer to 7%.

When compared vs the common shares which yield about 6.0% (today's close), the thing to remember as profitability returns, Russel has a stated goal to payout about 80% of earnings and therefore dividends on the common shares may increase before the redemption date.

I already own the common shares, but the convertibles came up in Q3 conference call, thus the original question about valuing the convertibles.
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Post by brad911 »

I haven't gotten into CD's yet in my activities although I do hold a variety of fixed income/equity hybrid investments.

Thanks for explaining the valuation Scomac and to PI for inquiring about the debentures. I still hold the common stock, but in the event I wanted something a little different these might be interesting in the future (if there were a mispricing or another opportunity).
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Re: Russel Metals (Symbol-RUS)

Post by Peculiar_Investor »

In http://www.financialwisdomforum.org/for ... 00#p372600
Pickles wrote:Me too. I just sold my recently re-acquired RUS when it booked a loss for the quarter. I got out with enough profit to "pay myself" two quarterly dividends. RUS declared next month's dividend despite the loss; I wonder whether it will be able to declare next quarter's. Interestingly enough, RUS finished UP for the day. What, me worry? indeed.
I read the Q4 press release and listened to their conference call. A few observations, the quarterly loss was the result of inventory write-downs. They are still free cash flow positive and have built up the cash on the balance sheet. They are seeing modest demand improvement, coupled with pricing increases, which are a good combination. In their prepared comments on the call, they went over the dividend covenant calculation and they are onside. Unlike past calls, there was no discussion and no questions about their ability to continue to pay their dividend, which I took as a positive sign.

They have great liquidity as a result of the actions they've taken on their balance sheet, which puts them in a great position at what is perceived to be the bottom of the cycle.

Still long Russel Metals and see no reason to sell, nor add to position at this time.
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Re: Russel Metals (Symbol-RUS)

Post by Pickles »

Thanks for your observations, P.I.

I did not listen to the call but I read their release which indicates that only 20% of their loss related to inventory writedowns. Also :
Lower demand and steel pricing have significantly reduced our revenues and operating profits for 2009 in all three of our business segments compared to 2008. The asset impairment charge of $35 million relates to goodwill, intangibles and buildings of businesses acquired in the U.S. in 2007 and 2008. This charge taken in the fourth quarter of 2009, resulted from significant volume and price declines in the U.S. service center industry in 2009 and lowered expectations for future earnings potential at these operations.
And
Revenues in our metals service centers segment decreased 44% to $236 million
for the fourth quarter of 2009 compared to the fourth quarter of 2008 and
decreased 9% compared to the third quarter of 2009.
WRT 2010:
Brian R. Hedges, President and CEO, stated "I am glad 2009 is behind us. Early
2010 activity levels have increased for both our metals service center and
energy tubular products operations compared to the end of 2009. The mill price increases announced for the first quarter of 2010 have firmed pricing in the
market. Our capital structure is well positioned to support growth during
2010." This sounds pretty vague to me, especially given the first quote above which appears to conflict with his prediction . They cut their dividend last year, and have had only one quarter where they turned a profit followed by another where they returned to a loss and had a decrease in revenues. I had hopes they might have weathered the worst and be on track for continued profits and modest growth but they seem to have slipped back in the last quarter.

You posted
Unlike past calls, there was no discussion and no questions about their ability to continue to pay their dividend, which I took as a positive sign.
Or just a polite omission? The absence of a discussion and a clearly stated commitment to maintain the dividend in 2010 is not positive to me. I'm being cautious on this one because it was a dividend cutter last year.
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Re: Russel Metals (Symbol-RUS)

Post by Shifty »

I was wrangling to free up cash to buy RUS in the low 17's this week, but it took off before I got the funds. Hate when that happens!
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Re: Russel Metals (Symbol-RUS)

Post by biker »

Nice bump today over 3%. Assume this report helped.I continue to hold.

DAVID BERMAN
11:36 EST Monday, Dec 13, 2010



-------------------------------------------------------------


You might not normally associate commodity producers with dividends, given their cyclical nature. But that could change according to a report from Byron Berry, of Byron Capital Markets.

“With companies like Freeport McMoRan doubling dividends, we have heard market participants discussing the possibility of more dividend increases,” he said in a note. “We would not normally look to cyclical for yield or dividend increases, but the combination of a powerful commodities bull run and a market starved for yield could create some opportunities.”

He looked at 880 mining and metals companies listed in Canada, with a market capitalization of at least $10-million each. Of these, 46 have positive free cash flow but only 12 companies pay a quarterly dividend. The average yield is about 1 per cent.

However, 12 companies have free cash flow yields above 6 per cent. “We believe this level of FCF yield gives enough headroom for a healthy 3-4 per cent yield and a payout ratio of 40 per cent to 67 per cent,” Mr. Berry said.

These companies include Equinox Minerals Ltd. , Inmet Mining Corp. , Russel Metals Inc. , Neo Material Technologies Inc. and Breakwater Resources Ltd.
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Re: Russel Metals (Symbol-RUS)

Post by biker »

And again today up over 3%

OOPS correction...now up over 6%
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Re: Russel Metals (Symbol-RUS)

Post by Descartes »

biker wrote:...now up over 6%
This has been quite a nice surprise this week!
I'm skeptical that it is just the report you mentioned that caused this but all mentioned in the report but Breakwater have experienced a similar jump in the last few days.
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Re: Russel Metals (Symbol-RUS)

Post by Springbok »

biker wrote:And again today up over 3%

OOPS correction...now up over 6%
I bought this as an infrastructure play when it dipped under $10.00. Nice to be right once in a while ;)

Probably should sell 1/2 but what to do with proceeds?
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Re: Russel Metals (Symbol-RUS)

Post by Peculiar_Investor »

The only news that I could find was this, Russel Metals Obtains Approval to Amend its Convertible Debentures. Also, the Metals Service Center Institute typically releases a monthly MSCI - Metals Activity Reports around the 16th of each month that gives a view into Russel's industry. Perhaps there is some really good news coming?

Valuation is getting a bit stretched given their current financials, it might be a signal to lighten up, but as Springbok notes, where does one deploy the proceeds into a better investment?

Disclosure: Long RUS
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Re: Russel Metals (Symbol-RUS)

Post by Arby »

S&P issued a report on Russel on Dec 13th which was relatively positive. Not sure if you need to be an S&P subscriber to access the report here.
Outlook
The stable outlook reflects our expectation that Russel Metals' operating performance will continue to improve gradually in 2010 and 2011, in line with a moderate economic recovery and increased end-market demand. As a result, we expect credit measures to continue to improve and to be maintained at levels consistent with a 'BB+' rating, with adjusted debt to EBITDA below 3.0x and FFO to debt about 30%.
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Re: Russel Metals (Symbol-RUS)

Post by Peculiar_Investor »

From a brokerage report, quoting MSCI
The Metals Service Center Institute (MSCI) reported that Canadian steel shipments in November were 513 thousand tons, an increase of 19.5% versus last year. Year to date, shipments in Canada are 15.1% higher than 2009. Canadian Steel inventories declined modestly in November to 1.3 million tons. ... In the U.S., shipments were up 28.4% y/y and are 20.2% higher on a year-to-date basis.
Looks positive for Russel Metals.
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Re: Russel Metals (Symbol-RUS)

Post by Taggart »

I doubt I'll be giving this company a second chance.

--------------------------------------------

Economy will test Russel's dividend mettle

JOHN HEINZL
From Wednesday's Globe and Mail
Published Tuesday, May. 15, 2012 7:45PM EDT
Last updated Wednesday, May. 16, 2012 6:48AM EDT
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Re: Russel Metals (Symbol-RUS)

Post by BRIAN5000 »

ltr, nice short term win. I still watch it, and I still don't know what to make of it. Recently released Q2 earnings were lower still, their EPS is now lower than their dividend. I still think a div cut is likely in the future, unless there is a turnaround in the second half of the year for them. So I'm still watching
I'm going from memory and its not very good I'm afraid.

Last time Russell was doing poorly management came out and said we need to cut the dividend to preserve the viability of the company. When the company started doing better they raised the dividend again. So yes there may be a dividend cut but I prefer this approach rather than the TRP lie through your teeth then cut the dividend approach. I see some earning projections of $1.40 for 2013 with a $1.40 dividend.
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