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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 Feb 13.

This water management, and process and motion control solutions provider 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, are discussed below.

Tactical Initiatives: Rexnord has undertaken a number of actions that are anticipated to yield benefits in the near and long term. To begin with, the company is working toward lowering capital expenditure and improve asset utilization. It predicts generating a minimum of $200 million in free cash flow in fiscal 2019 (ending March 2019). Also, the company expects net debt leverage ratio to be 2.1 at the end of fiscal 2019 and below 2 at the end of fiscal 2020.

The company anticipates benefiting from supply-chain optimization and footprint-repositioning programs (SCOFR). The second phase of these programs is predicted to lower annual costs by $15 million in fiscal 2020. The third phase, beginning in fiscal 2020, will likely yield annualized savings of roughly $20 million in the next 18-24 months.

Rexnord is also working hard to mitigate adverse impacts of tariffs and inflation through supply chain management, effective pricing actions, simplification of product lines and other measures. Rexnord will gain from growth in platforms and distribution channels, healthy relationship with customers, and solid product portfolio.

Acquisitions: Adding businesses to the portfolio has been working in Rexnord’s favor over time. Buyouts of World Dryer Corporation and Centa Power Transmission in fiscal 2018 are worth mentioning here. Since acquired, World Dryer has been strengthening the Water Management segment while Centa Power has been aiding Process and Motion Control segment.

In third-quarter fiscal 2019, the Centa Power buyout added 7% to the Process and Motion Control segment’s sales.

Impressive Outlook: Growth prospects are bright for Rexnord in fiscal 2019 on the back of acquired assets, healthy end-market demand, cost-saving actions and SCOFR initiatives. Net income for the fiscal year is predicted to be $169-$171 million, higher than $147-$154 million stated previously. Also, core sales growth will be at the higher end of the mid-single-digit range.

Process & Motion Control segment stands to gain from healthy demand in global food & beverage, global process industries, and global commercial-aerospace end markets. Also, improvement in the industrial-distribution business in the United States and Canada, and DiRXN will boost the segment’s growth. Conversely, the Water Management segment will gain from solid product portfolio, and healthy demand from non-residential construction markets of the United States and Canada.

In the past month, shares of Rexnord have increased 11.7% compared with the industry’s growth of 4.4%.

Factors Working Against Rexnord

Higher Costs & Expenses Drag: Over time, Rexnord has been dealing with increasing costs and expenses. The company’s cost of sales increased 12.7% over the year-ago comparable period while selling, general and administrative expenses grew 13.2% in the first nine months of fiscal 2019. Rise in freight expenses, tariff-related woes and inflation in raw material costs might hurt the company’s performance. The company expects anti-inflationary actions to bring in relief.

Notably, in the last five fiscal years (2014-2018), Rexnord’s cost of sales grew 0.4% (CAGR) while selling, general and administrative expenses increased 1.8% (CAGR).

Forex Woes: Geographical diversification exposed Rexnord to headwinds arising from geopolitical issues and unfavorable movements in foreign currencies. In the third quarter of fiscal 2019, forex woes adversely impacted sales growth by 2%.

Cash Position: Rexnord faces headwinds from weak cash position. In the last five fiscals (2014-2018), its cash and cash equivalents decreased 8.5% (CAGR) while its cash ratio declined from 0.75 in fiscal 2014 to 0.48 in fiscal 2018. Cash ratio below one indicates the company's inability to pay off its short-term liabilities while a falling ratio seems to be worsening the situation.

Stocks to Consider

Some better-ranked stocks in the Zacks Industrial Products sector are Colfax Corp. (CFX - Free Report) , Roper Technologies, Inc. (ROP - Free Report) , and Dover Corp. (DOV - Free Report) . All these stocks currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the past 60 days, earnings estimates for these stocks have improved for 2019. Further, the average earnings surprise was a positive 8.88% for Colfax, 4.96% for Roper and 6.59% for Dover.

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