On Jun 4, 2014, we issued an updated research report on Rexnord Corporation (RXN). Despite having substantial growth potential over the long term, the company faces trouble due to certain near-term headwinds. Hence, at current valuation levels, we prefer remaining on the sidelines regarding Rexnord.
Rexnord is an attractive long-term investment option in the electrical machinery industry. Year-to-date, it yielded a solid return of 39.3%, while over the next five years the company’s earnings are expected to grow by 16.8% versus 13.6% estimated for the industry.
The company operates in the mining, food & beverage, aerospace, non-residential construction and global water infrastructure end markets. Apart from such a diversified business structure which acts as a boon, acquisitions also play an important role in augmenting the company’s business. Green Turtle was acquired in Apr 2014, which is expected to expand the company’s Zurn business in Toronto, Ontario and Charlotte. In fiscal 2014, Rexnord spent roughly $112.0 million on acquisitions.
Moreover, Rexnord’s long-term and healthy relationship with customers and a solid product portfolio have earned it a huge number of replacement orders over time. Rexnord targets to achieve mid-single-digit core revenue growth, more than 30% incremental profit margins and free cash flow in excess of net income in the long term.
However, we remain wary of active competition, rising debt level and dilutive impact of share offerings on the earnings. Also, a majority of the end markets served by the company are affected by general market conditions. Any adverse economic movement, like the 2008 global crisis, will be detrimental to the company’s financial health. Further, dependence on a few large customers for a significant portion of the revenue raises the risks in the event of loss of contracts from these clients.
Rexnord Corporation currently has a $2.8 billion market capitalization and carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the industry include AO Smith Corp. (AOS), ESCO Technologies Inc. (ESE) and Nordson Corporation (NDSN). All these companies hold a Zacks Rank #2 (Buy).