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Regal Beloit Poised for Healthy Growth on Solid Q4 Results

Zacks

On Feb 13, we issued an updated research report on industrial goods manufacturer, Regal Beloit Corporation RBC.

Regal Beloit reported solid fourth-quarter 2017 results on the back of modest organic growth and positive order trends. On a GAAP basis, the company reported net income of $51.5 million or $1.15 per share compared with $45.6 million or $1.01 per share in the year-earlier quarter. The significant year-over-year improvement was backed by higher revenues.

Adjusted earnings were $1.14 per share compared with $1.04 in the year-ago quarter and came in line with the Zacks Consensus Estimate. Net sales increased to $820.7 million from $758.1 million, largely driven by organic growth across all segments. Moreover, quarterly revenues beat the Zacks Consensus Estimate of $790 million.

Over the years, Regal Beloit has consolidated its product lines and streamlined brands to evolve as a dynamic enterprise. In order to drive continuous improvement, the company has strictly followed ‘Compass Operating System’ that encompasses a common set of business processes, disciplines and lean Six Sigma tools. Backed by an “open-door” management style, this has helped Regal Beloit gain a competitive advantage and reach more people in diverse markets around the world.

In addition, the company has continually focused on prudent investment decisions for a disciplined capital allocation, strong and flexible balance sheet position and cash flow enhancement to support dividend growth. We believe that such moves, along with a robust operating platform and an efficient management team will help in the execution of its strategic priorities and drive net asset value in the future. The company’s strong free cash generation is another positive, providing it an opportunity to pursue accretive acquisitions and unlock additional value.

Furthermore, Regal Beloit continues to focus on simplification initiatives to lower operating costs and improve margins in the future. The company expects organic growth in 2018 to be in low single digits with modest demand trends. Its long-term strategy involves organic growth through innovative products, broadening customer base, exploitation of new opportunities and tactical investments in emerging markets. The company has also expanded technologically and geographically on the back of its aggressive acquisition policy. Management further indicated that it plans to continue seeking accretive acquisitions as part of its overall growth strategy. Regal Beloit remains confident of generating robust operating cash flow to fund its organic and inorganic growth as well as return significant capital to its shareholders.

Despite core strengths, Regal Beloit has underperformed the industry with an average year-to-date return of of 0.7% compared with a 4.6% gain for the latter. The electric motor manufacturing space is a highly competitive and fragmented. With the rise in competition within the industry, the company is witnessing a decline in its product prices, which is detrimental to its overall margins. Also, it has to continually invest heavily in R&D to introduce newer value-added products that provide a hedge against competition.

Nevertheless, we remain impressed with the inherent growth potential of this Zacks Rank #2 (Buy) stock. Other stocks in the industry worth considering include ESCO Technologies Inc. ESE, Emerson Electric Co. EMR and A. O. Smith Corporation AOS, each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ESCO Technologies has topped estimates twice in the trailing four quarters with an average positive earnings surprise of 2.4%.

Emerson Electric has a long-term earnings growth expectation of 9.3%. It topped estimates twice in the trailing four quarters with an average positive earnings surprise of 2.8%.

A. O. Smith has a long-term earnings growth expectation of 13.3%. It surpassed estimates thrice in the trailing four quarters with an average positive earnings surprise of 3.9%.

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