Prices for sheet metal work have been rising, and the durable goods orders show a rising trend.

Over the last 12 months, free cash flow (cash flow from operations less capital expenditures) has come in at $540 million, or 12.2% of Reliance’s current market capitalization. In 2007, it used $270 million to grow via acquisition and $82 million to repurchase shares. Even counting acquisitions as an alternative to capital expenditures, the free cash flow yield would be 6.1% — more than twice the current yield on five-year Treasuries. Modest growth from the acquisitions would allow for double-digit returns.

Reliance traded off somewhat when it reported earnings and guided to $1.50 to $1.60 per share in earnings for the June quarter. The consensus estimate prior to the report had been for $1.66, and it is currently $1.62. The guidance reflects uncertainty over demand and “flat to rising prices” and may thus prove conservative. Management was similarly uncertain when offering guidance for the recently reported quarter, and ended up beating estimates by 8 cents.

For the full year, earnings estimates continue to rise. Reliance is expected to earn $6.01 this year and $6.36 in 2009. Reliance’s nearest competitor, Worthington Industries (WOR) , is currently trading at 11.4 times forward earnings. At that multiple, Reliance shares could rise 20% to $72.50 over the next six to 18 months.

Disclosure: At time of publication, William Trent holds no financial position in the securities mentioned in this article.

In it, I extend yesterday’s observations about the hidden strength in durable goods orders to specific industries that might benefit. Among those industries were primary metals, computers and electronic products, and motor vehicles and parts.

These industries may prove to be a good starting point for further research.