Here's Why You Should Hold on to Rexnord (RXN) Stock Now

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We issued an updated research report on Rexnord Corporation RXN on May 17. Strong brand image and meaningful buyouts are key drivers for the company. On the flip side, costs and debts, as well as risks related to international operations, remain concerning for the company.

This machinery company, with a market capitalization of approximately $3 billion, currently carries a Zacks Rank #3 (Hold).

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

Factors Favoring Rexnord

Share Price Performance, Earnings Estimates: Rexnord's financial performance in the last four quarters was impressive. Average earnings surprise was +12.95%, including the impact of 7.69% earnings beat recorded for fourth-quarter fiscal 2018 (ended Mar 31, 2018). Also, as disclosed on May 14, the company's revenues for the fourth quarter surpassed the Zacks Consensus Estimate by 4.2%.

In the last three months, Rexnord's shares have yielded a return of 3%, outperforming roughly 3.7% decline recorded by the industry .

In the last seven days, Rexnord's earnings estimates for fiscal 2019 (ending March 2019) remained stable at $1.73 while grew 3.7% to $1.97 for fiscal 2020 (ending March 2020). While, in the last 60 days, earnings estimates for fiscal 2019 inched up 0.6% and grew 2.6% for fiscal 2020. On a year-over-year basis, the earnings estimates are predicted to increase 24.5% for fiscal 2019 and 13.8% for fiscal 2020.

Near- and Long-Term Growth Potential Solid: We believe that Rexnord is poised to grow on near- and long-term tailwinds. The company's solid product portfolio - including brands like Rexnord, Rex, Falk, Link-Belt, Zurn, Rodney Hunt and many more - as well as its efforts to innovate products and accentuate customer satisfaction will be a boon.

For instance, DiRXN - a digital-enterprise strategy that integrates innovative Industrial Internet of Things and e-commerce technologies to help customers in improving productivity -- was launched in May 2017. Since then, it has been strengthening the company's Process & Motion Control segment. Also, new products like Tollok TLK 136 and 390 Series MatTop Chain have been introduced in February 2018.

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

Over the long term, Rexnord anticipates achieving mid-single-digit core growth, 30% profit margin and free cash flow to exceed net income. Adjusted EBITDA margin is expected to be 30-35% for the Process & Motion Control segment and 20-25% for the Water Management segment.

Strategic Organic & Inorganic Initiatives: In fiscal 2018, Rexnord finished the first phase of its supply-chain optimization and footprint-repositioning programs. To further enhance productivity, reduce fixed costs and improve free cash flow, the company initiated the second phase in fiscal 2019. It anticipates realizing annual cost reductions of $15 million upon the completion of this phase in fiscal 2020.

Also, over time, the company acquired meaningful businesses while disposed of non-core assets to improve its business portfolio. In fiscal 2018, the company acquired World Dryer Corporation and Centa Power Transmission. Water Management segment's Zurn business will get a boost from the World Dryer's hand dryers while the Centa Power Transmission assets will strengthen the Process and Motion Control segment, and create business opportunities in the couplings market.

Recently, the company announced to divest its VAG operations from the Water Management segment. The divestment of this non-strategic business will free resources that can be utilized by the company for lowering its debt burden.

Factors Working Against Rexnord

Rising Costs & Expenses, Huge Debts Raise Concerns: Rexnord is dealing with adverse impacts of rising costs and expenses. In fiscal 2018, the company's cost of sales increased 4.7% year over year while selling, general and administrative expenses rose 8.8%. Also, its long-term debt was approximately $1.4 billion while exiting the fiscal. We believe, if unchecked, rising costs and expenses, and huge debt levels can be detrimental to the company's profitability in the quarters ahead.

Threats from Diversity: Global expansion has exposed Rexnord to risks, arising from adverse movements in foreign currencies. Also, uncertainties in economic growth of the countries, where the company serves, can severely impact the company's businesses. Moreover, the company operates in various end-markets - including construction, general industrial, mining, water infrastructure and aerospace industries. The downturn in one or more of these markets, where the company serves, will have an adverse impact on its financials.

Industry Competition: Rexnord faces stiff competition from companies, offering similar products and services or those producing different items for same uses. Also, failure of new products in the market might hurt the company's competitive edge.

Some better-ranked stocks in the industry include Franklin Electric Co., Inc. FELE , A. O. Smith Corp. AOS and Regal Beloit Corp. RBC . All these stocks carry a Zacks Rank of 2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

In the last 60 days, earnings estimates for these three stocks increased for both the current year and the next year. Also, average earnings surprise for the last four quarters is +5.27% for Franklin Electric, +3.12% for A. O. Smith and +1.60% for Regal Beloit.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Symbols: AOS , RXN , FELE , RBC

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