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Rexnord (RXN) Up 12.8% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Rexnord . Shares have added about 12.8% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Rexnord 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 drivers.

Rexnord Q2 Earnings Beat, Increase Y/Y on Solid Sales

Rexnord reported better-than-expected results for the second quarter of 2021.

The machinery company’s adjusted earnings in the reported quarter were 58 cents per share, surpassing the Zacks Consensus Estimate of 50 cents. The bottom line increased 61.1% from the year-ago quarter earnings of 36 cents on the back of improved sales performance and margins.

Sales Details

In the reported quarter, Rexnord’s net sales were $568.3 million, increasing 26.5% from the year-ago quarter. The results benefitted from 21% growth in core sales, 3% gain from foreign currency translations and 3% contribution from acquisitions/divestitures.

Its net sales surpassed the Zacks Consensus Estimate of $544.2 million.

The company reports results under two segments — Process & Motion Control, and Water Management. The second-quarter segmental results are briefly discussed below:

Revenues from Process & Motion Control totaled $324.6 million, up 18.3% year over year. It represented 57.1% of the company’s quarterly net sales. Core sales in the reported quarter increased 16% year over year, driven by 21% growth in the non-aerospace business, partially offset by a 15% decline in the aerospace business. Foreign currency translations benefited the company by 4%, while divestitures had an adverse impact of 2%.

Water Management’s revenues, representing 42.9% of net sales, were $243.7 million, up 39.5% year over year. Core sales in the reported quarter increased 29%, whereas acquired assets (Hadrian) contributed 9% to sales growth. The rise in core sales was driven by high product demand. Foreign currency translations had a positive impact of 1% in the quarter.

Margin Profile

In the reported quarter, Rexnord’s cost of sales increased 22.2% year over year to $332.5 million. It represented 58.5% of net sales versus 60.6% recorded in the year-ago quarter. Gross margin increased 210 basis points (bps) to 41.5%. Selling, general and administrative expenses of $122 million increased 21.8% year over year and represented 21.5% of net sales versus 22.3% in the year-ago quarter.

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were $133.4 million, up 26.5% from the year-ago quarter. Adjusted EBITDA margin was 23.5% in the quarter under review, increasing 50 bps from the year-ago quarter. For the Process & Motion Control segment, adjusted EBITDA margin increased 260 bps year over year to 24.2%, whereas that for the Water Management segment decreased 230 bps to 26.8%.

Adjusted operating income increased 34.8% year over year to $110.3 million, whereas margin grew 120 bps to 19.4%. Interest expenses, net, in the reported quarter were $11.7 million, down 12.7% year over year.

Balance Sheet and Cash Flow

Exiting the second quarter of 2021, Rexnord had cash and cash equivalents of $390.7 million, reflecting 27.1% growth from $307.3 million recorded in the last reported quarter. Long-term debt was stable sequentially at $1,189.5 million.

In the quarter under review, the company generated net cash of $73.7 million from operating activities, increasing 54.8% year over year. Capital investment for purchasing property, plant and equipment declined 43.5% to $4.8 million. Free cash flow was $68.9 million, increasing from $39.1 million in the prior-year quarter.

In the first half of 2021, the company paid out dividends totaling $21.6 million, reflecting an 11.3% increase from the year-ago comparable period. It also repurchased shares worth $0.9 million during the same period.

Outlook

For the third quarter of 2021, the company expects Water Management sales to increase in high-teens, with double-digit core sales growth. Adjusted EBITDA margin for the segment is expected to be 26-27%.

Sales for the Process & Motion Control segment are anticipated to increase by mid-teens on a year-over-year basis. Adjusted EBITDA margin for the segment is expected to be 23-24%.

Corporate expenses for the third quarter are expected to be $10 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

At this time, Rexnord has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision looks promising. Notably, Rexnord has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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