A month has gone by since the last earnings report for Regal Beloit (RBC - Free Report) . Shares have lost about 7.8% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Regal Beloit due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Regal Beloit Q1 Earnings Top Estimates, Sales Lag
Regal Beloit delivered better-than-expected results for the first quarter of 2019. Its earnings surpassed estimates by 1.42%. This was the third consecutive quarter of impressive results. However, the company's sales lagged estimates by 2.98%.
Regal Beloit's adjusted earnings in the reported quarter were $1.43 per share, surpassing the Zacks Consensus Estimate of $1.41. Also, the bottom line increased 13.5% from the year-ago quarter’s number of $1.26 on the back of improved margins in the quarter.
Core Sales, Divestments and Forex Woes Impact Revenues
In the reported quarter, Regal Beloit's net sales were $853.8 million, decreasing 2.8% year over year. Adverse impacts of 1% from organic sales, 4% from divestments and 1.7% from forex woes influenced results. However, these were partially offset by 3.9% gain from acquired assets.
The top line lagged the Zacks Consensus Estimate of $880 million.
Excluding the impact of divested business, the company's adjusted net sales in the reported quarter were $832.7 million, up 1.2% year over year.
The company reports results under three segments — Climate Solutions, Commercial and Industrial Systems, and Power Transmission Solutions. The quarterly segmental results are briefly discussed below:
Revenues from Climate Solutions totaled $263.3 million, increasing 1.3% year over year. It represented 30.8% of net sales. Organic sales grew 3.6%, offset by forex woes of 1.2% and divestiture impact of 1.1%. Demand was healthy for commercial refrigeration and residential HVAC in North America. International business was weak in the quarter under review.
Commercial and Industrial Systems' revenues, representing 44.6% of net sales, were $380.3 million, down 8.1% year over year. Organic sales in the reported quarter decreased 6.3% while divestments resulted in adverse impact of 8%. Also, forex woes lowered sales by 2.1%. These were partially offset by 8.3% gain from acquired assets.
While organic sales in the quarter gained from the healthy commercial HVAC market and gain in industrial markets of North America, weakness in China, pool pump market in North America and unfavorable timings of power generation projects played spoilsport.
Power Transmission Solutions' revenues, representing 24.6% of net sales, were $210.2 million, up 2.6% year over year. Organic sales growth of 3.4% was driven by healthy demand for oil & gas, distribution, and metal markets, partially offset by softness in beverage and agriculture markets. Forex woes had an adverse impact of 1.4% while divestments added 0.6%.
Margins Improve Y/Y
In the reported quarter, Regal Beloit's cost of sales decreased 3.8% year over year to $619.2 million. It represented 72.5% of net sales versus 73.3% recorded in the year-ago quarter. Gross margin increased 80 basis points (bps) to 27.5%. Operating expenses of $104 million decreased 29.1% year over year to $104 million and represented 12.2% of net sales in the quarter.
Adjusted operating profit was $91.2 million, up 6.8% year over year, while margin expanded 60 bps to 11%. Adjusted effective tax rate in the quarter was 20.7% versus 20.9% in the year-ago quarter.
Balance Sheet and Cash Flow
Exiting the first quarter of 2019, Regal Beloit had cash and cash equivalents of $264.3 million, reflecting 6.3% growth from $248.6 million recorded in the last reported quarter. Long-term debt decreased 7.1%, sequentially, to $1,213.2 million.
Notably, the company repaid $24.1 million of debt during the quarter while raised funds amounting to $69.6 million through debt borrowings.
In the first quarter, Regal Beloit generated net cash of $18.3 million from operating activities, reflecting a year-over-year decline of 56.9%. The company increased capital investment for purchasing property, plant and equipment by 4.7% over the year-ago figure to $20.2 million. Free cash outflow was $1.9 million in the quarter versus cash flow of $23.2 million in the year-ago quarter.
During the quarter, the company paid dividends totaling $12 million to shareholders and refrained from repurchasing any shares.
For 2019, the company anticipates gaining from solid product portfolio and productivity enhancement initiatives. Adjusted earnings per share are expected to be $6.15-$6.55, reflecting growth from $6.00 reported in 2018. Organic sales are predicted to increase in a low-single digit versus low-to mid-single digit mentioned earlier. Adjusted operating margin is likely to improve.
Capital expenditure is predicted to be $90 million and free cash flow is likely to be more than 100% of adjusted net income. Adjusted effective tax rate will be 21%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -5.64% due to these changes.
At this time, Regal Beloit has a subpar Growth Score of D, a grade with the same score on the momentum front. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Regal Beloit has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.