Investors seeking exposure in the industrial machinery space can choose from stocks that currently sport a Zacks Rank #1 (Strong Buy) or 2 (Buy). Of the many investment options, we believe that Rexnord Corporation (RXN - Free Report) will be a smart choice. This Milwaukee, WI-based company’s stock currently carries a Zacks Rank #2 and has a VGM Score of A.
We believe that the industry to which Rexnord belongs gains from infrastructural development, pro-growth policies of the government, lower taxes (due to the implementation of the U.S. Tax Cuts and Jobs Act), solid manufacturing activities and other tailwinds.
Below, we discussed why investing in Rexnord will be a smart choice for investors.
Share Price Performance, Impressive Earnings Outlook: Market sentiments seem to be working in favor of Rexnord over time. In the past three months, the company’s share price has gained 9.1%, higher than the industry’s growth of 8.4%.
Positive movements to some extent are fuelled by the company’s impressive third-quarter fiscal 2019 (ended Dec 31, 2018) results. It recorded earnings beat of 17.5% for the quarter. It is worth noting here that the company has a history of recording positive earnings surprise, the average for the past four quarters being 12.82%.
For fiscal 2019 (ending March 2019), Rexnord believes that solidifying end-market businesses, synergistic gains from acquired assets, cost-saving measures, and supply-chain optimization and footprint-repositioning (SCOFR) programs will be advantageous.
Core sales are anticipated to increase in the upper half of a mid-single-digit range in the year. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) is expected to be $437-$443 million versus $433-$443 million mentioned earlier. In addition, net income is predicted to grow from previously stated $147-$154 million to $169-$171 million.
In the past 60 days, earnings estimates for fiscal 2019 have been revised upward by six brokerage firms. Currently, the Zacks Consensus Estimate is pegged at $1.81 for fiscal 2019, reflecting growth of 3.4% from 60 days ago. Further, estimates reflect year-over-year growth of 30.2%.
Rexnord Corporation Price and Consensus
Solid Segmental Business: Rexnord is hopeful of its two business segments — Process & Motion Control, and Water Management. The company anticipates healthy demand in global food & beverage, global process industries, and global commercial-aerospace end markets to be beneficial for the Process & Motion Control segment in fiscal 2019. In addition, the industrial-distribution business in the United States and Canada as well as DiRXN will add strength.
For the Water Management segment, the company believes that solid product portfolio and healthy demand from non-residential construction markets of the United States and Canada will be beneficial.
Inorganic Moves: Over time, Rexnord fortified the product portfolio and leveraged business opportunities through the addition of assets and disposition of non-core assets.
Notably, the company completed the divestment of VAG operations from the Water Management segment in the third quarter of fiscal 2019. Divestment proceeds can be used for deleveraging balance sheet. Also, Rexnord acquired World Dryer Corporation and Centa Power Transmission in fiscal 2018. It is worth mentioning here that the Centa Power buyout added 7% to the Process and Motion Control segment's sales in the third quarter of fiscal 2019.
Long-Term Expectations: Free cash flow improvement remains a priority for Rexnord. It anticipates generating minimum of $200 million in free cash flow in fiscal 2019 and further increase it in fiscal 2020 (ending March 2020). Also, the company believes that net debt leverage ratio will be 2.1 at the end of fiscal 2019 and below 2 at the end of fiscal 2020.
SCOFR programs’ second phase will help in lowering annual costs by $15 million in fiscal 2020 while the third phase (to begin in fiscal 2020) is likely yield annualized savings of roughly $20 million in the next 18-24 months. Further, effective pricing actions, supply-chain management, product-line simplification and other measures will help in mitigating adverse impacts of tariffs and inflation.
Moreover, the company believes that growth in platforms and distribution channels, healthy relationship with customers, and solid product portfolio will boost business.
Other Key Picks
Other top-ranked stocks in the Zacks Industrial Products sector are DXP Enterprises, Inc. (DXPE - Free Report) , Sun Hydraulics Corporation and Roper Technologies, Inc. (ROP - Free Report) . While DXP Enterprises and Sun Hydraulics currently sport a Zacks Rank #1, Roper carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
In the past 60 days, earnings estimates for all these three stocks have improved for the current year. Further, average earnings surprise for the last four quarters was a positive 46.55% for DXP Enterprises, 2.27% for Sun Hydraulics and 4.96% for Roper.
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