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Regal Beloit (RBC) Focuses on Holistic Growth Despite Risks


On Apr 10, we issued an updated research report on industrial goods manufacturer, Regal Beloit Corporation RBC.

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. 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, exploration 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 loss of 10.4% in the last six months compared with a decline of 3.4% 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. It has to continually invest heavily in R&D to introduce newer value-added products that provide hedge against competition.

Moreover, Regal Beloit faces increased concentration risks as a significant amount of its revenues is obtained from a handful of customers. The loss of any one of these customers could adversely affect the company’s top line. Adverse foreign currency translation, soft oil & gas markets and a challenging economy of China remain headwinds. Also, the cyclical business is dependent on industrial and consumer spending and continues to be affected by macroeconomic industrial cycles both in domestic and international markets. In addition, Regal Beloit’s earnings are susceptible to exchange rate volatility, which further undermines its growth potential.

Nevertheless, we remain impressed with the inherent growth potential of this Zacks Rank #3 (Hold) stock. Some better-ranked stocks in the industry worth considering are Eaton Corporation plc ETN, Energous Corporation WATT and Rexnord Corporation RXN, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Eaton has a long-term earnings growth expectation of 9.9%. It topped estimates twice in the trailing four quarters with an average positive earnings surprise of 3%.

Energous has topped estimates thrice in the trailing four quarters with an average positive earnings surprise of 3.6%.

Rexnord has a long-term earnings growth expectation of 12.5%. It surpassed estimates in each of the trailing four quarters with an average positive earnings surprise of 12.6%.

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