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Rexnord Remains at Outperform

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We maintained our Outperform recommendation on Rexnord Corporation (RXN - Free Report) , anticipating the company to perform better than the broader market in the next 6-12 months.

Why Maintained at Outperform?

Rexnord Corporation is a well-known mechanical components manufacturer, known globally for its specialized process and motion control, and water management products. The company provided a year-to-date return of 11.8%. Earnings growth rate for the next five years is estimated at 23.4%, considerably higher than 14.7% predicted for the industry.

The company’s presence in diversified end markets, including mining, food and beverage, aerospace, non-residential construction and global water infrastructure, acts as a boon. We find Rexnord well positioned to grow its Process & Motion Control and Water Management platforms given the 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.

Entry into unexplored markets, strengthening foothold in existing markets and expansion of product lines become easier through meaningful acquisitions. In the first half of fiscal 2014, Rexnord spent roughly $34.4 million on acquisitions, up from $21.0 million used in fiscal 2013. The company is also working diligently towards lowering its financial burden. Refinancing actions taken in Aug 2013 are anticipated to save $41-$48 million annually in pre-tax interest expenses and lead to earnings per share accretion of 25-30 cents.

Over the long term, Rexnord targets to achieve mid-single-digit core growth, 30+% incremental profit margins and free cash flow in excess of net income. For full fiscal year 2014, management has raised its earnings per share guidance to $1.32-$1.38 from $1.12-$1.18 expected earlier. Core sales growth is anticipated to be 3%-4%, up from 2%-4% expected earlier.

A brief of the second quarter of fiscal 2014 has been provided below:

Rexnord Corporation reported impressive results for the second quarter of fiscal 2014. Earnings per share increased 29.2% year over year and revenue grew by 3.0%. Core sales growth was driven by solid performance at the company’s two business segments — Process & Motion Control core sales grew 1% while Water Management core sales grew 6% year over year. The improvements were the result of a diversified product portfolio, improving demand, and benefits derived from growth initiatives.

Other Stocks to Consider

Rexnord Corporation currently has a $2.4 billion market capitalization and carries a Zacks Rank #2 (Buy). Other stocks worth considering in the sector include EnerSys (ENS - Free Report) , AO Smith Corp. (AOS - Free Report) and Raven Industries Inc. (RAVN - Free Report) . While EnerSys and AO Smith carry a Zacks Rank #1 (Strong Buy), Raven Industries holds a Zacks Rank #2 (Buy).

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