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Rexnord Gains From Healthy Segmental Business Despite Risks

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We issued an updated research report on Rexnord Corporation on Nov 26.

The company, with a market capitalization of $3.3 billion, currently carries a Zacks Rank #3 (Hold). It provides solutions related to water management, and process and motion control.
Many tailwinds and headwinds are impacting its performance. Let’s delve deeper.

Factors Favoring Rexnord

Share Price Performance and Earnings Estimate Trend: The company’s shares outperformed the industry in the past three months. This reflects that market sentiment seems to be working in its favor. Its shares have gained 24.1% compared with the industry’s growth of 20.2%.

Notably, the company reported better-than-expected results in the second quarter of fiscal 2020 (ended Sep 30, 2019), with earnings surpassing estimates by 8.5%. It has positive earnings surprise of 12.13%, on average, for the last four quarters.

For fiscal 2020 (ending March 2020), the company will gain from acquired assets, strong operational execution through Rexnord Business System, supply-chain optimization and footprint-repositioning programs (SCOFR), and leverage reduction. It anticipates net income (from continuing operations) of $184-$189 million for fiscal 2020.

In addition, earnings estimates for Rexnord have been raised in the past 30 days. The Zacks Consensus Estimate for the company’s earnings is pegged at $1.98 for 2019 and $2.18 for 2020, suggesting growth of 2.1% and 1.9% from the respective 30-day-ago figures.

Rexnord Corporation Price and Consensus


Rexnord Corporation Price and Consensus

Rexnord Corporation price-consensus-chart | Rexnord Corporation Quote

Operating Conditions: The company operates through two segments — Process and Motion Control, and Water Management. Rexnord anticipates rising demand in the food & beverage market and strength in the global commercial aerospace market to benefit the Process & Motion Control segment. Also, growth in the industrial distribution business in the United States and Canada will be a boon.

In addition, the Water Management segment will likely gain from investments in the product portfolio, solid demand from non-residential construction markets in the United States and Canada, and market expansion.

The Zacks Consensus Estimate for Rexnord’s revenues is pegged at $2.07 billion for fiscal 2020 and $2.12 billion for fiscal 2021 (ending March 2021), suggesting year-over-year growth of 0.8% and 2.4%, respectively.

Buyouts: The company has been benefiting from acquired assets. In fiscal 2019 (ended March 2019), Rexnord added World Dryer Corporation and Centa Power Transmission buyout assets to its portfolio. The World Dryer buyout has been strengthening the Water Management segment and the Centa Power Transmission acquisition has been adding value to the Process and Motion Control segment.

Rexnord acquired in June 2019. Notably, the buyout boosted the Water Management segment's sales by 1% in the second quarter of fiscal 2020.

Factors Working Against Rexnord

Top-Line Headwinds: Rexnord expects the Process & Motion Control segment to be adversely impacted by persistent softness in the industrial distribution business in Europe in fiscal 2020. Also, a slowdown in the process industry might prove detrimental.

The company also anticipates product line simplification initiatives to hurt sales by 150-200 basis points in fiscal 2020. Core sales in the year are expected to grow in low-single digits, indicating a decline from 6% registered in fiscal 2019.

Forex Woes: We believe that international diversity has exposed Rexnord to geopolitical issues and unfavorable movements in foreign currencies. In the second quarter of fiscal 2020, forex woes adversely impacted its sales growth by 2%.

For fiscal 2020, the company anticipates forex woes to have an adverse impact of $4 million on the adjusted earnings before interest, tax, depreciation and amortization.

High Debts: Rexnord has a highly leveraged balance sheet, with long-term debt of $1,249.3 million at the end of the fiscal second quarter. Moreover, the company seems to be more leveraged than the industry, with respective long-term debt to capital of 49.7% and 29.2%, respectively.

The persistence of a highly leveraged balance sheet can raise financial obligations for the company and adversely impact profitability.

Stocks to Consider

Some better-ranked stocks in the Zacks Industrial Products sector are Tennant Company TNC, Dover Corporation DOV and Standex International Corporation SXI. While Tennant currently sports a Zacks Rank #1 (Strong Buy), Dover and Standex carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, earnings estimates for Tennant and Dover have improved for the current year while remained unchanged for Standex. Further, positive earnings surprise for the last reported quarter was 40% for Tennant, 4.58% for Dover and 2.11% for Standex.

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