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We recently downgraded our recommendation on Rexnord Corporation (RXN - Analyst Report) from Outperform to Neutral, expecting the company to perform in line with the broader market in the next 6–12 months.

Why the Downgrade?

We find Rexnord well positioned to grow its Process & Motion Control and Water Management platforms on the back of increasing backlog in the non-residential construction market in the U.S. and Canada, growing demand for clean water and rising demand in the aerospace industry.

Rexnord has provided a year-to-date return of 29.0%. The earnings growth rate for the next five years is estimated at 23.4%, considerably higher than 14.7% predicted for the industry.

Also, acquisitions are expected to play a major role in expanding Rexnord’s businesses. In this regard, the recent acquisition of Precision Gear Holdings is worth mentioning. The acquired assets will help widen the company’s product offerings within its Process and Motion Control platform.

Also, Rexnord’s presence in diversified end markets, including mining, food and beverage, aerospace, non-residential construction and global water infrastructure, acts as a boon. For fiscal 2014, management anticipates core sales growth to be within 3%–4% and earnings per share in a band of $1.32–$1.38. Moreover, refinancing of term debts will have a positive impact on the company’s free cash flow and earnings.  

Anticipating that the impacts of these positives have already been accounted for in the company’s share price, we have downgraded our recommendation to Neutral on Rexnord. Also, risks from customer concentration, adverse market conditions and stiff competition raise our concern.

Other Stocks to Consider

Rexnord Corporation currently has a $2.7 billion market capitalization and carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry include EnerSys (ENS - Snapshot Report), Pioneer Power Solutions, Inc. (PPSI) and Raven Industries Inc. (RAVN - Analyst Report). While both EnerSys and Pioneer hold a Zacks Rank #1 (Strong Buy), Raven Industries carries a Zacks Rank #2 (Buy).

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