We issued an updated research report on Rexnord CorporationRXN on Nov 21.
This water management and process and motion control solutions provider currently carries a Zacks Rank #2 (Buy). This represents an upward revision from the company's earlier Zacks Rank #3 (Hold). Its market capitalization is approximately $2.9 billion.
Let's delve deeper and discuss why investors should consider adding Rexnord's stock to their portfolio.
Financial Performance & Outlook: Rexnord's financial performances have been impressive for quite some time now. It pulled off an average positive earnings surprise of 17.71% for the last four quarters, beating estimates in all occasions. Notably, the company delivered earnings surprise of 12.20% for the last quarter (ended Sep 30, 2018). On a year-over-year basis, the bottom line increased 37.5% on the back of core sales growth, buyout synergies and improved margin profile.
Rexnord believes that impressive product demand in end-markets served, as well as initiatives to reduce costs and improve operating leverage, is likely to be advantageous in fiscal 2019 (ending March 2019). Core sales in the fiscal year are anticipated to grow in the higher end of the mid-single-digit range. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) will be $433-$443 million, higher than $425-$440 million predicted earlier. Further, net income is anticipated to be $147-$154 million, higher than the previously mentioned $132-$143 million.
Growth Opportunities in Segments: Rexnord is poised to gain from its strengthening segmental businesses. It anticipates that growing demand in the global process, food & beverage, and commercial-aerospace end markets is likely to benefit the Process & Motion Control segment in fiscal 2019. Moreover, healthy industrial-distribution businesses in Canada, the United States and the Rest of the World (excluding Europe) will be a boon. Moreover, DiRXN has been an added advantage since its launched in May 2017.
On the other hand, the Water Management segment will gain from strengthening demand from non-residential, and residential construction markets of the United States and Canada.
Inorganic Initiatives: One of the attractive features of Rexnord is its acquisitive nature. In fiscal 2018 (ended March 2018), the company acquired World Dryer Corporation and Centa Power Transmission. It integrated World Dryer with its Water Management segment, and Centa Power with Process and Motion Control segment. In second-quarter fiscal 2019, World Dryer contributed 3% to Water Management's sales growth while Centa Power added 10% to the Process and Motion Control segment's sales.
In addition to these, divestment of VAG operations from the Water Management segment will free resources that can be utilized by the company for lowering its debt burden.
Share Price Performance & Earnings Estimates: Impressive financial performance and solid outlook for fiscal 2019 supported positive sentiments on the stock. It's worth noting here that the company's share price has yielded 5.7% return in the past month. This share price gain is better than the industry 's 3.6% decline during the same period.
Moreover, earnings estimates on Rexnord for fiscal 2019 were increased by five brokerage firms and lowered by one. Likewise, estimates for fiscal 2020 (ending March 2020) were positively revised by three firms. Currently, the Zacks Consensus Estimate for earnings per share was increased by 2.9% to $1.75 for fiscal 2019 and by 1% to $1.98 for fiscal 2020. Further, these earnings estimates represent year-over-year growth of 25.9% for fiscal 2019 and 13.2% for fiscal 2020.
Rexnord Corporation Price and Consensus
Long-Term Targets: Over time, Rexnord's solid product portfolio and healthy relationship with customers earned it a huge number of replacement orders. This solidified the company's revenue base. Further, its supply-chain optimization and footprint-repositioning programs (with the first phase completed in fiscal 2018 and the second phase targeted to close in fiscal 2020) have been a boon. Cost savings (annual) of $15 million is anticipated upon the completion of the second phase.
In the years ahead, the company targets core sales to grow in a mid-single digit while anticipates 30% profit margin. Moreover, free cash flow will be in excess of net income. Adjusted EBITDA margin is expected to be 30-35% and 20-25% for the Process & Motion Control and Water Management segments, respectively.
Per our estimates, Rexnord's earnings will grow 16.4% in the next three to five years. This growth projection is higher than 14.1% predicted for the industry.
Buyouts and Divestments: Over time, Rexnord easily penetrated unexplored markets, added products to portfolio and expanded geographical footprints, with the help of acquired assets. Further, divestments helped improve the company's business profile and shareholders' return. In the first quarter of fiscal 2019, net impact of acquisitions and divestitures had positive 8% impact on sales growth.
It's worth mentioning here that World Dryer Corporation and Centa Power Transmission were acquired in fiscal 2018 (ended March 2018). Hand dryers offered by World Dryer strongly complement Water Management's Zurn business, and Centa Power assets are generating growth opportunities for Process and Motion Control in the couplings market. Moreover, divestment of VAG operations - discontinued operations with Water Management segment - is likely to free resources that can be utilized by the company for lowering debt burden.
Others Stocks to Consider
As discussed above, Rexnord seems to be a suitable investment choice for investors seeking exposure in the machinery space. Some other top-ranked stocks in the industry in which Rexnord belongs include Enersys ENS , CUI Global, Inc. CUI and Plug Power, Inc. PLUG . While Enersys sports a Zacks Rank #1 (Strong Buy), both CUI Global and Plug Power carry a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here .
In the past 30 days, bottom-line estimates for the three stocks improved for the current year. Further, positive earnings surprise for the last quarter was 0.86% for Enersys, 60% for CUI Global and 12.50% for Plug Power.
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