Reasons Why Investments in Rexnord Should Be Avoided for Now
Rexnord Corporation RXN seems to have lost its sheen to the adverse impacts of the coronavirus outbreak, forex woes and high leverage. Also, weak price performance and lowered earnings estimates indicate bearish sentiments for the stock.
The Milwaukee, WI-based company has a market capitalization of $3.1 billion and a Zacks Rank #4 (Sell) at present. It belongs to the Zacks Manufacturing – Electronics industry, currently at the bottom 21% (with the rank of 201) of more than 250 Zacks industries.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
We believe that the industry is suffering from global uncertainties, unfavorable movements in foreign currencies, cost-related headwinds, supply-side challenges and other woes. However, favorable governmental policies might be a relief.
Notably, Rexnord’s earnings surpassed estimates by 14.3% in third-quarter fiscal 2020 (ended Dec 31, 2019), while sales lagged the same by 0.8%.
In the past three months, the company's shares have fallen 22.5% compared with the industry’s decline of 26.4%.
Factors Affecting Investment Appeal
Coronavirus-Related Worries: Rexnord believes that the demand for its products will be adversely impacted by the pandemic. It has also withdrawn its share buyback program for now, while continues with its dividend policy.
For fiscal 2020 (ended March 2020, results are awaited), Rexnord expects core sales growth of 1% year over year. The estimate suggests a year-over-year decline from 6% growth registered in fiscal 2019.
High Debts: High debts increase financial obligations and, in turn, hurt profitability. At the end of the first three quarters of fiscal 2020 (ended December 2019), Rexnord’s long-term debts were $1,147.2 million. During this period, the company raised $725 million from borrowings of debt.
Further, Rexnord appears more leverage than the industry, with the respective long-term debt-to-capital figure of 45.6% and 31.4%.
Forex Woes: The presence in the United States, Europe and Canada has exposed Rexnord to geopolitical issues, macroeconomic challenges and unfavorable movements in foreign currencies. In the third quarter of fiscal 2020, forex woes affected the company’s sales by 1%.
Persistence of such issues might pose concerns for Rexnord.
Bottom-Line Estimate Trend: The Zacks Consensus Estimate for the company’s earnings has been revised downward in the past 60 days. The consensus estimate for earnings per share is currently pegged at $1.98 for fiscal 2020 and $1.62 for fiscal 2021 (ending March 2021), reflecting no change and a decline of 22.9% from the respective 60-day-ago figures.
Rexnord Corporation Price and Consensus
Rexnord Corporation price-consensus-chart | Rexnord Corporation Quote
Notably, two downward revisions were recorded for fiscal 2020 earnings as against one upward revision. Further, there were five downward revisions and no upward revision for fiscal 2021.
Rexnord’s Performance Versus Industry Peers
The company has underperformed three industry peers in the past three months. Three such stocks are Franklin Electric Co., Inc. FELE, Eaton Corporation plc ETN and A. O. Smith Corporation AOS, with respective three-month declines of 16.6%, 16.1% and 12.6%.
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