We issued an updated research report on Regal Beloit Corporation RBC on Jun 10.
The company currently carries a Zacks Rank #3 (Hold) and has a market capitalization of approximately $3.3 billion.
A few growth drivers and certain headwinds, which might influence Regal Beloit, have been discussed below.
Factors Favoring the Company
Share Price Performance, Earnings Projections: Market sentiments seem to be working in favor of Regal Beloit over time. Year to date, the company’s share price has gained 13.6%, higher than the industry’s growth of 6%.
We believe that impressive financial results helped in driving sentiments for the stock. Regal Beloit in the last reported quarter (first-quarter of 2019) recorded positive earnings surprise of 1.42%, being this the third consecutive quarter of better-than-expected results. Its average earnings surprise for the last four quarters is a positive 3.04%.
For 2019, the company anticipates gaining from productivity enhancement initiatives and solid product portfolio. It expects adjusted earnings per share to be $6.15-$6.55, higher than $6.00 recorded in 2018.
Shareholder-Friendly Policies: The company effectively uses capital for making acquisitions (explained below), investing in growth projects and rewarding shareholders handsomely. For rewards, it pays dividends and buys back shares. It is worth mentioning here that it increased the quarterly dividend rate by 7% in April this year.
In the first quarter of 2019, the company did not repurchase any shares but paid dividends amounting to $12 million. In 2018, it repurchased shares worth $127.8 million and paid dividends of $47.2 million.
Inorganic Moves: The company seems to favor acquisitions and divestment of businesses to fortify its product portfolio. Nicotra Gebhardt, acquired in April 2018, has been strengthening its Commercial & Industrial Systems segment. In the first quarter of 2019, acquired assets boosted sales by 3.9%.
The company has also divested Regal Drive Technologies to an affiliate of Sun Capital Partners in the first quarter of this year. This move will help the company to concentrate on core businesses. For 2019, it anticipates businesses divested and assets to be exited to benefit earnings by 74 cents.
Factors Working Against Regal Beloit
Top-Line Weakness: The company’s top-line performance in the first quarter of 2019 was weak. Revenues declined 2.8% year over year and also lagged estimates by 2.98%. Organically, its sales fell 1% due to weakness in Commercial and Industrial Systems.
For 2019, the company predicts organic sales to grow in a low-single digit, down from the previous projection of growth in a low- to mid-single digit.
Forex Woes: Geographical diversification is reflective of a flourishing business of the company. However, this diversity exposed it to headwinds arising from geopolitical issues and unfavorable movements in foreign currencies. In the first quarter of 2019, forex woes adversely impacted its sales growth by 1.7%. Persistence of such issues might be concerning for the company.
Highly Leverage Balance Sheet: In the last five years (2014-2018), Regal Beloit’s long-term debt grew 15.9% (CAGR). The metric at the end of the first quarter of 2019 was $1,213.2 million. Also, net expenses in the quarter were $12.5 million.
We believe that a highly leveraged balance sheet might be detrimental to the company, as it raises financial obligations and pressures margins. For 2019, it predicts net interest expenses to be approximately $51 million.
Stocks to Consider
Some better-ranked stocks in the Zacks Industrial Products sector are Chart Industries, Inc. GTLS, DXP Enterprises, Inc. DXPE and Dover Corporation DOV. While Chart Industries currently sports a Zacks Rank #1 (Strong Buy), DXP Enterprises and Dover carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
In the past 60 days, earnings estimates for these three stocks have improved for the current year. Further, average earnings surprise for the last four quarters was positive 16.56% for Chart Industries, 48.47% for DXP Enterprises and 8.61% for Dover.
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