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Why Is Rexnord (RXN) Up 8.2% Since Last Earnings Report?

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A month has gone by since the last earnings report for Rexnord (RXN - Free Report) . Shares have added about 8.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Rexnord due for a pullback? 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 drivers.

Rexnord Q2 Earnings Surpass Estimates, Revenues Miss

Rexnord reported better-than-expected earnings for the second quarter of fiscal 2020 (ended Sep 30, 2019). It pulled off a positive earnings surprise of 8.5%.

This machinery company’s adjusted earnings were 51 cents per share, surpassing the Zacks Consensus Estimate of 47 cents. Also, the bottom line jumped 10.9% from the year-ago quarter number of 46 cents on benefits from buyouts and margin improvement.

Inside the Headlines

In the reported quarter, Rexnord’s net sales were $521.3 million, decreasing 0.7% year over year. The decline was attributable to 2% adverse impact of foreign currency translation, partially offset by 1% contribution from net positive impact of acquisitions/divestitures. The company’s net sales lagged the Zacks Consensus Estimate of $526 million by 0.9%.

The company reports results under two segments — Process & Motion Control, and Water Management. The quarterly segmental results are briefly discussed below:

Revenues from Process & Motion Control totaled $337 million, decreasing 3% year over year. It represented 64.6% of net sales. Core sales fell 2% due to weak demand across some of its industrial process end markets and the impact of the company’s ongoing product line simplification actions. The acquisition of Centa Power added 1% to sales growth while unfavorable movements in foreign currencies negatively impacted results by 2%.

Water Management revenues, representing 35.4% of net sales, were $184.3 million, up 5% year over year. Core sales in the quarter grew 4% backed by demand growth in building construction markets in North America. However, product line simplification actions played spoilsport in the quarter.

Margin Profile

In the reported quarter, Rexnord’s cost of sales decreased 2.6% year over year to $313.1 million. It represented 60.1% of net sales compared with 61.3% recorded in the year-ago quarter. Gross margin increased 120 basis points (bps) to 39.9%. Selling, general and administrative expenses of $108.8 million decreased 0.7% and represented 20.9% of net sales compared with 20.9% a year ago.

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were $118.2 million, up 2.6% year over year. Adjusted EBITDA margin was 22.7%, up roughly 80 bps. For Process & Motion Control, adjusted EBITDA margin increased 70 bps to 23% while that for Water Management expanded 30 bps to 27.4%.

Adjusted tax rate in the quarter was 25.6%, down from 27% in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the fiscal second quarter, Rexnord had cash and cash equivalents of $319.8 million, reflecting a 9.3% increase from $292.5 million recorded in fiscal 2019 end. Long-term debt increased 1% to $1,249.3 million from fiscal 2019 end. Notably, the company repaid $5.4 million of debt in the first six months of fiscal 2020.

In the first six months of fiscal 2020, it generated net cash of $86.3 million from operating activities, reflecting 14.9% year-over-year growth. It decreased the capital investment for purchasing property, plant and equipment by 25% from the previous year to $13.2 million. Free cash flow was $73.1 million, increasing 27.1% from the year-ago figure.

Outlook

For fiscal 2020, Process & Motion Control is likely to benefit from strengthening demand in global commercial aerospace end markets. The industrial distribution business in the United States and Canada will probably grow as well.

Sales in Water Management are likely to gain from a solid product portfolio and healthy demand from non-residential construction markets of the United States and Canada, especially from institutional clients.

For fiscal 2020, the company maintained its projections, with core sales expected to grow in low-single digit. Product line simplification initiatives are predicted to have an adverse impact of 150-200 bps on sales.

Adjusted EBITDA guidance is expected to be in the range of $460-$467 million compared with $460-$475 million guided earlier. Net income from continuing operations is likely to be $184-$189 million compared with the previously estimated $181-$191 million. The effective tax rate is expected to be roughly 26%.

Capital expenditure is anticipated to be below 2.5% of sales. Free cash will exceed net income. Interest expenses are predicted to be approximately $62 million, down from the previously stated $65 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Rexnord has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions has been net zero. Notably, Rexnord has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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