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Regal Beloit (RBC) Trims View on Oil & Gas Sector Frailties

DHR IIVI AOS RBC

Trades from $3

On Nov 11, Zacks Investment Research updated the research report on industrial goods manufacturer Regal Beloit Corporation (RBC - Free Report) .

Headquartered in Beloit, WI, Regal Beloit is a leading manufacturer of electrical and mechanical motion control products. The company offers a wide array of stock model and customized electric motors, blowers, electric generators, transfer switches, switchgear, valves, gearboxes, power generation components and controls. Regal Beloit has manufacturing, sales and service facilities throughout the U.S., Canada, Mexico, Europe and Asia. The company markets its products to a diversified customer base across the globe including OEMs, distributors and end users.

Q3 Earnings Beat But Sales Miss

Regal Beloit reported lackluster third-quarter 2016 results with a significant year-over-year decline in net sales and earnings owing to macroeconomic woes. On a GAAP basis, the company reported a net income of $59.6 million or $1.32 per share compared with $63.4 million or $1.41 per share in the year-earlier quarter. The year-over-year decline in GAAP earnings was primarily due to lower revenues.

Adjusted earnings for the quarter were $1.31 per share compared with $1.43 per share in the year-ago quarter. Although adjusted earnings declined significantly year over year, it beat the Zacks Consensus Estimate of $1.26.

Net sales fell to $809.6 million from $882.3 million in the year-earlier quarter owing to depressed oil & gas markets, adverse foreign currency translation and an adverse impact from divestitures. Quarterly revenues missed the Zacks Consensus Estimate of $829 million.

Narrowed Guidance

Regal Beloit’s third-quarter results were severely impacted by the fragilities in the oil & gas sector and the overall industrial end markets. The company expects its sales to be affected by the continued weakness in industrial markets. Regal Beloit trimmed its guidance for 2016 and currently anticipates adjusted earnings per share in the range of $4.40–$4.50 per share, compared with the earlier projection of $4.35–$4.55. GAAP earnings are expected to be within $4.45–$4.55 per share. Regal Beloit continues to focus on simplification initiatives to lower operating costs and improve margins in the future.

Moving Forward

Electric motor manufacturing is a highly competitive and fragmented industry. With intensifying competition, Regal Beloit is witnessing a decline in its product prices, which is denting its overall margin. Moreover, the company has to continually invest heavily in R&D to introduce newer value-added products to cushion itself from competition. All these limit the company’s profitability to some extent.

Regal Beloit also faces increased concentration risks as a significant amount of its revenue is obtained from a handful of customers. Loss of any of these customers could adversely impact the company’s top line.

Nevertheless, Regal Beloit continues to focus on prudent investment decisions for disciplined capital allocation, strong and flexible balance sheet position and cash flow enhancement to support dividend growth. We believe that such moves along with its robust operating platform and an efficient management team will help in the execution of its strategic priorities and drive net asset value and dividend growth in the future.

Other Stocks to Consider

Regal Beloit presently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the industry include II-VI Incorporated (IIVI - Free Report) , AO Smith Corp. (AOS - Free Report) and Danaher Corp. (DHR - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

II-VI Incorporated is currently trading at a forward P/E of 26.5x and has beaten estimates in each of the trailing four quarters for an average earnings surprise of 39.8%.

AO Smith has a long-term earnings growth expectation of 10.7% and is currently trading at a forward P/E of 25.9x.

Danaher has a long-term earnings growth expectation of 11.8% and is currently trading at a forward P/E of 22.4x.

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