It has been about a month since the last earnings report for Regal Beloit (RBC - Free Report) . Shares have added about 9.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Regal Beloit due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Regal Beloit Q2 Earnings Top Estimates, Sales Miss
Regal Beloit delivered mixed results for the second quarter of 2020. Its earnings surpassed estimates by 46.15% — this being the fourth consecutive quarter of impressive earnings results. However, its quarterly sales lagged estimates by 3.39%.
Adjusted earnings in the reported quarter were 95 cents per share, surpassing the Zacks Consensus Estimate of 65 cents. However, the bottom line declined 36.2% from the year-ago quarter’s figure of $1.49 on weak sales performance and a fall in operating margins.
In the reported quarter, Regal Beloit’s net sales were $634.1 million, declining 27.4% year over year. Organic sales in the quarter fell 24.7%, while forex woes and divestments had adverse impacts of 1.2% and 1.5%, respectively.
Also, the top line lagged the Zacks Consensus Estimate of $656 million.
Excluding the impacts of divested businesses, the company’s adjusted net sales in the reported quarter were $634.1 million, down 25.9% year over year.
Regal Beloit reports results under four segments — Climate Solutions, Commercial Systems, Industrial Systems and Power Transmission Solutions. The quarterly segmental results were adversely impacted by the pandemic. A brief discussion is provided below:
Revenues from Climate Solutions totaled $178.2 million, declining 33.5% year over year. It represented 28.1% of net sales. The results were adversely impacted by an organic sales decline of 31.4%, forex woes of 0.7% and divestiture impact of 1.4%.
Commercial Systems’ revenues, representing 27.7% of net sales, were $175.9 million, down 28.6% year over year. Organic sales in the reported quarter declined 23.6%, while divestments resulted in an adverse impact of 3.8%. Also, forex woes lowered sales by 1.2%.
Industrial Systems generated revenues of $120.6 million, reflecting a year-over-year decline of 22.4%. It represented 19% of the quarter’s net sales. Organic sales decreased 19.8% year over year. Forex woes hurt results by 2.6%.
Power Transmission Solutions’ revenues, representing 25.2% of net sales, were $159.4 million, down 21.9% year over year. Organic sales dipped 21.1%. Forex woes and divestments had adverse impacts of 0.7% and 0.1%, respectively.
In the reported quarter, Regal Beloit’s cost of sales declined 27.5% year over year to $463.8 million. It represented 73.1% of net sales versus 73.2% recorded in the year-ago quarter. Gross profit decreased 27.2% year over year to $170.3 million, while margin increased 10 basis points (bps) to 26.9%. Operating expenses of $121.6 million decreased 11.9% year over year and represented 19.2% of net sales in the quarter.
Adjusted operating profit was $59.5 million, down 36.6% year over year, while margin declined 160 bps to 9.4%. Interest expenses in the quarter were down 20.9% year over year to $10.6 million.
Adjusted effective tax rate in the quarter was 22.4% versus 20.4% in the year-ago quarter.
Balance Sheet and Cash Flow
Exiting the second quarter of 2020, Regal Beloit had cash and cash equivalents of $432.2 million, reflecting a 28.5% decline from $604.5 million recorded in the last reported quarter. Long-term debt decreased 17.5% sequentially to $1,125.1 million.
In the quarter, the company’s net repayments under revolving credit facility totaled $239.5 million.
In the first half of 2020, Regal Beloit generated net cash of $189.6 million from operating activities, reflecting year-over-year growth of 45.2% from $130.6 million reported in the year-ago period. The company’s capital investment for purchasing property, plant and equipment decreased 63.7% from the year-ago figure to $20.4 million. Free cash flow was $169.2 million in the quarter versus $74.4 million in the year-ago period.
Free cash flow (as a % of adjusted net income) was 255.4% in the second quarter and 219.2% in the first half of 2020.
During the first half of 2020, the company paid out dividends totaling $24.3 million to shareholders and repurchased shares worth $25 million (no buybacks were made in the second quarter).
In the quarters ahead, the company anticipates gaining from its cost-control measures that are essentially implemented to deal with the pandemic. Total cost savings are anticipated to be $42 million in 2020. Also, its existing restructuring and supply-chain efforts as well as reorganization actions (80/20) might aid.
The company is wary about the impacts of uncertainties related to the pandemic on its near- and mid-term demand for products. For now, it refrained from providing earnings and sales projections for 2020. However, the company predicts a year-over-year sales decline of 8-12% for the third quarter. Deleverage on net sales will likely be 12-18%.
Capital expenditure in the year is expected to be $50 million; adjusted effective tax rate will likely be 21%, and restructuring and related costs will probably be $25 million. Free cash flow (as a % of adjusted net income) will likely be more than 125%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review. The consensus estimate has shifted 27.13% due to these changes.
At this time, Regal Beloit has a subpar Growth Score of D, a grade with the same score on the momentum front. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Regal Beloit has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.