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Rexnord Gains From Solid Segmental Businesses, Costs Ail

By Zacks Investment ResearchJun 17, 2018 10:12PM ET
Rexnord Gains From Solid Segmental Businesses, Costs Ail
By Zacks Investment Research   |  Jun 17, 2018 10:12PM ET
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We issued an updated research report on Rexnord Corporation (NYSE:RXN) on Jun 18.

This machinery company currently carries a Zacks Rank #3 (Hold). Its market capitalization is approximately $3.1 billion.

Let’s delve deeper and discuss the company’s potential growth drivers and probable headwinds.

Factors Favoring Rexnord

Financial Performance, Near- and Long-Term Targets: In the last four quarters, Rexnord delivered better-than-expected results, with a positive average earnings surprise of 12.95%. Notably, the company’s earnings and sales topped the Zacks Consensus Estimate by 7.7% and 4.2%, respectively, in fourth-quarter fiscal 2018 (ended Mar 31, 2018).

In the past three months, the company’s shares have yielded 1.4% against roughly 0.9% decline recorded by the industry.

For fiscal 2019, Rexnord anticipates core sales growth to be in mid-single digit. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) are projected to be $420-$440 million.

Additionally, in the long run, the company anticipates core sales growth to be in mid-single digit, profit margin to be 30% and free cash flow to be in excess of the net income.

Strengthening Segmental Business: Rexnord serves a large customer base in the mining, food & beverage, aerospace, non-residential construction and global water-infrastructure end markets through its two business segments: Process & Motion Control, and Water Management.

For fiscal 2019, Process & Motion Control segment is poised to gain from strengthening demand in global food & beverage, global process industries, and global commercial-aerospace end markets. Industrial-distribution business in the United States, Canada and the Rest of the World will also flourish. Also, DiRXN — a digital enterprise strategy that integrates innovative Industrial Internet of Things and e-commerce technologies to help customers in improving productivity — will be advantageous.

The Water Management segment will benefit from healthy demand from non-residential and residential construction markets of the United States and Canada.

In the long-term, adjusted EBITDA margin for the Process & Motion Control segment is expected to be 30-35% while the Water Management segment is anticipated to be 20-25%.

Cost-Reduction Initiatives and Inorganic Moves: After completing the Phase I of its supply-chain optimization and footprint-repositioning programs in fiscal 2018, Rexnord initiated the second phase in fiscal 2019. It anticipates annual cost reduction of $15 million, upon the completion of the second phase in fiscal 2020.

Beside this organic move for boosting profitability, Rexnord has been active in acquiring businesses for gaining exposure in unexplored markets and strengthening its product portfolio. In fiscal 2018, the company acquired World Dryer Corporation and Centa Power Transmission. While the World Dryer buyout complements Water Management segment’s Zurn business, the Centa Power buyout has strengthened the Process and Motion Control segment by creating business opportunities in the couplings market.

In addition to buyouts, the company believes in divesting non-core businesses. In May 2018, it decided to divest its VAG operations, a part of Water Management segment. The divestment of this business will free resources that can be utilized by the company for lowering debt burden.

Factors Working Against Rexnord

Poor Valuation and Lower Earnings Estimates: On a P/E (TTM basis), Rexnord’s stock looks overvalued compared with the industry, based on the respective tallies of 21.6x and 20.8x in the past three months. Also, the stock is trading slightly above its past three-months median multiple of 21.5x. This makes us cautious of the stock.

Moreover, earnings estimates on the company have been revised downward in the last 60 days. The Zacks Consensus Estimate is currently pegged at $1.71 for fiscal 2019 (ending March 2019), representing a decline of 1.2% from its 60-day-ago tally.

Rising Costs & Expenses Raise Concerns: Rexnord is dealing with adverse impacts of rising costs and operating expenses. Notably, the company’s cost of sales in the last five fiscals (2014-2018) grew at 0.4% (CAGR) while its operating expenses went up 1.8%. Notably, in the fourth quarter of fiscal 2018, cost of sales and operating expenses increased by 11.4% and 22.8% from their respective tallies in the year-ago quarter. We believe that unwarranted rise in costs and expenses will prove detrimental to the company’s margins and profitability.

Weak Cash Position: A weak cash position over time, evident from falling cash and cash equivalents as well as declining cash ratio, can prove detrimental for Rexnord. In the last five fiscals (2014-2018), the company’s cash and cash equivalents went down 8.5% (CAGR) while its cash ratio has fallen from 0.75 in fiscal 2014 to 0.48 in fiscal 2018. Notably, in the fourth quarter of fiscal 2018, the company’s cash and cash equivalents were down 7.3% sequentially while its cash ratio slipped from 0.61 in the fiscal third quarter to 0.48 in the fourth quarter. It is worth noting here that cash ratio below one indicates the company’s inability to pay off its short-term liabilities.

Stocks to Consider

Some better-ranked stocks in the industry are Franklin Electric Co., Inc. (NASDAQ:FELE) , Capstone Turbine Corporation (NASDAQ:CPST) and Regal Beloit Corporation (NYSE:RBC) . All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the past 60 days, bottom-line estimates for these three stocks improved for the current year. Also, average earnings surprise for the last four quarters is a positive 5.27% for Franklin Electric, 37.50% for Capstone Turbine and 1.60% for Regal Beloit.

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Original post

Zacks Investment Research
Rexnord Gains From Solid Segmental Businesses, Costs Ail
Rexnord Gains From Solid Segmental Businesses, Costs Ail

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