RBC Bearings Incorporated ROLL seems to have lost its sheen to weakness in industrial end markets, lower production days and high costs.
The manufacturer of plain, roller and ball bearings, with a market capitalization of $4.1 billion, currently carries a Zacks Rank #4 (Sell).
The company belongs to the Zacks Manufacturing – General Industrial industry, currently at the bottom 22% (with the rank of 197) of more than 250 Zacks industries. We believe that the industry is suffering from global uncertainties, unfavorable movements in foreign currencies, softness in the housing market and weakness in industrial production in the United States. Cost escalation, resulting from tariff woes as well as commodity inflation, and high labor costs and freight charges are also affecting the industry.
Notably, RBC Bearings’ second-quarter fiscal 2020 (ended Sep 28, 2019) results were better than expected, with earnings surpassing estimates by 7.4%. Despite the impressive results, market sentiment is cautious for the stock. Over the past three months, the company’s shares have gained 2.7% compared with the industry’s growth of 8.9%.
Also, RBC Bearings’ stock currently seems overvalued compared with the industry. The company’s P/E (TTM) multiple is 32.5x while the same for the industry is 21.73x. Also, its current multiple is higher than the industry’s three-month highest level of 21.73x.
Factors Impacting RBC Bearings’ Investment Appeal
Soft Industrial Market & View: The company sources revenues from aerospace and industrial end markets. While it benefited from growth in the aerospace market in second-quarter fiscal 2020, weakness in the industrial market played a spoilsport.
Notably, industrial organic sales declined 5% year over year in second-quarter fiscal 2020. The poor performance was due to weakness in general industrial and energy end markets. On a segmental basis, industrial sales decreased 20.7% year over year for Roller Bearings and 5.2% for Ball Bearings. We believe that the persistence of these headwinds might adversely impact the company’s revenues in the quarters ahead.
In addition, it anticipates four to five days lower shipping and production days due to the holiday season to adversely impact sales for the third quarter of fiscal 2020 (ending December 2019).
High Costs: We believe that high costs and operating expenses, if unchecked, might adversely influence RBC Bearings’ margins and profitability in the quarters ahead.
In second-quarter fiscal 2020, the company’s costs of sales, and selling, general and administrative expenses increased 5.4% and 4.9%, respectively, while the metrics expanded 3.5% and 1.7% in the fiscal first quarter (ended June 2019).
Trend in Bottom-Line Projection: RBC Bearings’ earnings estimates have been lowered in the past 30 days. The Zacks Consensus Estimate for earnings per share is currently pegged at $5.22 for fiscal 2020 (ending March 2020) and $5.73 for fiscal 2021 (ending March 2021), reflecting declines of 1.1% and 2.9%, respectively, from the 30-day-ago figures.
Also, earnings estimates for the fiscal third and fourth quarters declined 4.5% to $1.26 and 3.8% to $1.50 from the respective 30-day-ago figures.
RBC Bearings Incorporated Price and Consensus