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RBC Bearings Battles Margin Pressure on Solid Growth Drivers

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On Jul 10, we issued an updated research report on premium industrial goods firm RBC Bearings Inc. (ROLL - Free Report) .

The company currently carries a Zacks Rank #3 (Hold).

Over the past 30 days, the Zacks Consensus Estimate for the company’s earnings remained unchanged for fiscal 2019 (ending March 2019) at $4.65, reflecting neutral broker sentiment.

Let’s dig into the fundamental aspects influencing the performance of this stock.

Existing Growth Drivers

RBC Bearings intends to become the leading provider of precision engineered components and bearings in the market. In sync with this, the company acquires potential businesses, enlarges its customer base, deploys capital for innovation investments and expands business in new end-markets. Moreover, the company believes steaming up manufacturing activity in the United States will aid in spurring demand for its engineering and bearing products, going forward.

RBC Bearings’ year-over-year revenue growth came in at 3% and 9.7% in fiscals 2017 and 2018, respectively. This upside primarily stemmed from strong industrial and aerospace end-markets demand

The company anticipates that sturdier industrial original equipment manufacturers (OEM), as well as aftermarket and distribution demand will drive its industrial revenues in the quarters ahead. Also, new contracts, additional engine and airframe builds, and higher defense and aero industrial OEM demand will likely boost its aerospace sales, moving ahead.

Moreover, RBC Bearings’ backlog at the end of fiscal 2018 increased 10.7% year over year to $392 million. This shows that the company is on track to secure solid organic sales growth in fiscal 2019. RBC Bearings currently anticipates to secure revenue growth of 4.3-6.2% in first-quarter fiscal 2019.

Per our estimates, the company’s year-over-year revenue growth is currently pegged at 8.6% and 10% for fiscals 2019 and 2020, respectively. Its annualized earnings growth is predicted to be 20.2% and 15.6%, for fiscals 2019 and 2010, correspondingly.

RBC Bearings has been also improving its liquidity on the back of increased cash generation for the past few quarters. The company intends to lower its debt burden, fund new growth-oriented investments and provide higher returns to shareholders with these proceeds.

Causes of Concern

Rising expenses, if not checked, might continue to weigh over the company’s profitability in the upcoming quarters. The company’s margins have been affected by elevated material costs and higher selling expenses. Notably, ongoing capacity expansion moves in the company’s five manufacturing sites and increased new product development costs are expected to hurt RBC Bearings’ margins in early fiscal 2019.

Also, its sales guidance for fiscal 2019 includes a sales headwind of nearly $2.5-$3.0 million for the locked Canadian facility. The company shut down this less profitable facility at the end of first-half fiscal 2018.  

Moreover, on a P/E (TTM) basis, RBC Bearings’ shares look overvalued compared with the industry, with the respective tallies of 34.9x and 21.7x, for the last three months. Notably, the stock is currently trading higher than the median P/E (TTM) range for the same time frame.

Price Performance

Over the past month, RBC Bearings’ shares have rallied 3.1%, as against the 3.1% loss recorded by the industry.

Stocks to Consider

Some better-ranked stocks in the same space are listed below:

Chart Industries, Inc. (GTLS - Free Report) sports a Zacks Rank #1 (Strong Buy). The company’s earnings per share (EPS) are predicted to grow 26.9% in the next three to five years. You can see the complete list of today’s Zacks #1 Rank stocks here.

Roper Technologies, Inc. (ROP - Free Report) also flaunts a Zacks Rank of 1. The company’s EPS is estimated to rise 12.3%, over the next three to five years.

Graco Inc. (GGG - Free Report) holds a Zacks Rank #2 (Buy).  The company’s EPS will likely be up 10.3% during the same time frame.

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