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Regal Beloit (RBC) Down 11.7% Since Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Regal Beloit Corporation (RBC - Free Report) . Shares have lost about 11.7% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Regal Beloit Beats on Q2 Earnings, Updates Guidance

Regal Beloit reported relatively healthy second-quarter 2017 results on the back of modest organic growth and positive order trends. Adjusted earnings for the quarter were $1.29 per share compared with $1.14 in the year-ago quarter. Adjusted earnings beat the Zacks Consensus Estimate by a penny.

On a GAAP basis, the company reported earnings of $53.0 million or $1.18 per share compared with $56.6 million or $1.26 per share in the year-earlier quarter. The year-over-year decline despite higher revenues was primarily due to higher cost of sales and operating expenses.

Net sales improved to $869.2 million from $838.6 million in the year-earlier quarter, largely driven by organic growth across all the segments. Quarterly revenues also beat the Zacks Consensus Estimate of $853 million.

GAAP operating income decreased to $83.0 million from $91.4 million in the prior-year quarter. Adjusted operating income was $90.4 million compared with $81.5 million in the year-ago quarter for respective adjusted operating margins of 10.4% and 9.7%.

Segmental Analysis

Revenues from the Power Transmission Solutions segment increased 1% year over year to $191.3 million. Sales were backed by improved oil & gas and renewable energy end market demand, partially offset by foreign currency translation and the Mastergear divestiture. Operating margin (GAAP) decreased to 11.6% from 16.0% in the prior-year quarter due to restructuring and related expenses.

Net sales in the Commercial and Industrial System segment were $407.4 million, up 3.2% year over year driven by strength in Asia, oil & gas and commercial HVAC (heating, ventilation, and air conditioning) market. Operating margin (GAAP) fell to 5.1% from 6.4% due to restructuring and related expenses.

Net sales from the Climate Solutions segment were $270.5 million, up 6.3% year over year due to strength in the North American residential HVAC market, partially offset by softness in commercial refrigeration. Operating margin (GAAP) increased to 14.9% from 14.2%.

Balance Sheet and Cash Flow

At quarter end, Regal Beloit had cash and cash equivalents of $243.7 million while long-term debt was $1,199.5 million. The company paid down $70.3 million of debt during the quarter and repurchased $21.0 million worth of shares.

Net cash from operating activities totaled $98.4 million, down from $117.5 million in the year-ago period, bringing the respective year-to-date tallies to $148.9 million and $176.1 million. Free cash flow was 154.2% of net income or $81.7 million compared with the respective tallies of 177.9% and $100.7 million in second-quarter 2016.

Revised Guidance

Regal Beloit continues to focus on simplification initiatives to lower operating costs and improve margins in the future. The company expects organic growth for the year in low single digits with healthy demand trends. Consequently, Regal Beloit revised its adjusted earnings per share guidance in the range of $4.70–$5.00 (up from the earlier expectation of $4.55–$4.95), while GAAP earnings are expected in the range of $4.51–$4.81 (up from $4.40–$4.80).

How Have Estimates Been Moving Since Then?

Following the release and in the last month, investors have witnessed a downward trend in fresh estimates. There have been two revisions higher for the current quarter compared to four lower.

VGM Scores

At this time, Regal Beloit's stock has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for value investors than those looking for growth and momentum.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift.  Notably, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.


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