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Here's Why You Should Hold on to Rexnord (RXN) Stock Now

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We issued an updated research report on Rexnord Corporation (RXN - Free Report) on Oct 15.

This machinery company currently carries a Zacks Rank #3 (Hold). Its market capitalization is approximately $2.8 billion.

A few growth drivers and certain headwinds, which might influence Rexnord, have been discussed below.

Factors Favoring Rexnord

Impressive Bottom-Line Projections: Rexnord pulled off a positive earnings surprise of 13.89% for the first quarter of fiscal 2019 (ended Jun 30, 2018). For the rest of the quarters of fiscal 2019 (ending March 2019), the company anticipates benefiting from innovative products, buyouts and solid product demand in end-market served. Further, it believes that supply-chain optimization and footprint-repositioning programs will be boons.

For fiscal 2019, core sales are projected to grow in a mid-single digit. Net income is anticipated to be $132-$143 million versus $129-$143 million stated earlier. The revised guidance has a mid-point of $137.5 million, higher than the previous projection’s mid-point of $136 million.

In the long term, the company targets achieving mid-single-digit core growth and 30% profit margin.

Moreover, the Zacks Consensus Estimate for earnings on the stock is pegged at $1.70 per share for fiscal 2019 and $1.96 for fiscal 2020 (ending March 2020), representing year-over-year growth of 22.3% and 15.5%, respectively. Additionally, the company’s earnings are estimated to increase 16.4% in the next three to five years, higher than 14.2% projected for the industry.

Rexnord Corporation Price and Consensus

Rexnord Corporation Price and Consensus | Rexnord Corporation Quote

It’s worth mentioning here that the company’s shares have yielded 4.2% return year to date against 8.6% decline recorded by the industry.

Solid Business Opportunities: Rexnord seems well placed to gain from its two business platforms — Process & Motion Control, and Water Management.

The company believes that strengthening demand in global food & beverage, global process industries, and global commercial-aerospace end markets will be advantageous for the Process & Motion Control segment in fiscal 2019. The segment will also gain from strengthening industrial-distribution business in the United States, Canada and the Rest of the World as well as from growing acceptance of DiRXN — a platform that integrates innovative Industrial Internet of Things and e-commerce technologies to help customers in improving productivity.

For the Water Management segment, Rexnord anticipates healthy demand from residential and non-residential construction markets of the United States, and Canada to be beneficial.

In the long run, the company believes that adjusted earnings before interest, tax, depreciation and amortization margin will be 30-35% for Process & Motion Control, and 20-25% for Water Management.

Buyouts and Divestments: Over time, Rexnord easily penetrated into unexplored markets, added products to portfolio and expanded geographical footprints, with the help of acquired assets. Further, divestments have helped improve the company’s business profile and shareholders’ return. In the first quarter of fiscal 2019, net impact of acquisitions and divestitures had positive 8% impact on sales growth.

It’s worth mentioning here that World Dryer Corporation and Centa Power Transmission were acquired in fiscal 2018 (ended March 2018). Hand dryers offered by World Dryer strongly complement Water Management’s Zurn business, and Centa Power assets are generating growth opportunities for Process and Motion Control in the couplings market. Moreover, divestment of VAG operations — discontinued operations with Water Management segment — is likely to free resources that can be utilized by the company for lowering debt burden.

Factors Working Against Rexnord

Rising Costs & Expenses: In the last five fiscals (2014-2018), Rexnord’s cost of sales grew 0.4% (CAGR) while selling, general and administrative expenses increased 1.8% (CAGR). Further, the company recorded 10.4% increase in cost of sales, and 15.6% growth in selling, general and administrative expenses in the first quarter of fiscal 2019. We believe that unwarranted rise in costs and expenses will prove detrimental to the company’s margins, and profitability.

Rexnord believes that higher raw materials costs, rise in freight expenses and tariffs-related woes might be concerning. In the second quarter of fiscal 2019 (ended September 2018), margins for Water Management is predicted to fall year over year. Notably, the company will be implementing anti-inflationary measures.

Weak Cash Position: Falling cash and cash equivalents, as well as declining cash ratio, are reflective of weak position. It is worth noting here that cash ratio below one indicates that the company is unable to pay off its short-term liabilities.

Rexnord’s cash and cash equivalents declined 8.5% (CAGR) in the last five fiscals (2014-2018) and its cash ratio fell from 0.75 in fiscal 2014 to 0.48 in fiscal 2018. In the first quarter of fiscal 2019, the company’s cash and cash equivalents declined 7.3% sequentially and its cash ratio fell to 0.41.

A weak cash position of Rexnord is concerning.

High Debts: A highly leveraged balance sheet can inflate Rexnord’s financial obligations and hurt profitability. In the first quarter of fiscal 2019, the company’s long-term debt declined 1.4% sequentially. Despite this respite, long-term debt as high as $1.3 billion is concerning. Moreover, fresh issuance in the quarters ahead is bound to increase this balance. Moreover, the company’s total debt-to-total equity increased from 111.8% in fourth-quarter fiscal 2018 (ended March 2018) to 113.3% in first-quarter fiscal 2019.

Stocks to Consider

Some better-ranked stocks in the industry are Enersys (ENS - Free Report) , Ideal Power Inc. and Eaton Corporation plc (ETN - Free Report) . While Enersys and Ideal Power sport a Zacks Rank #1 (Strong Buy), Eaton carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, bottom-line estimates for the three stocks remained unchanged for the current year. Further, average positive earnings surprise for the last four quarters was 2.86% for Enersys, 2.87% for Eaton and 18.09% for Ideal Power.

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