Rexnord Corp. Is Seeing Slow Growth, But Growth Nonetheless

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Rexnord Corp. (NYSE:RXN) isn’t exactly a well-known company, but its stock has some potential. The company designs, manufactures, markets, and services process and motion control, and water management products worldwide. The company operates through two segments, Process and Motion Control Platform and Water Management Platform.

The Process and Motion Control Platform segment designs, manufactures, markets, and services mechanical components used in complex systems. It offers gears, couplings, industrial bearings, aerospace bearings and seals, chains, engineered chains, and conveying equipment under the brand names of Steelflex, Thomas, Omega, Rex, Viva, Wrapflex, Lifelign, True Torque, Addax, Autogard, FlatTop, PSI, Cartriseal, Precision Gear, Micro Precision, Rexnord, Falk, and Link-Belt.

This segment offers its products through distributors to mining, general industrial, cement and aggregates, agriculture, forest and wood products, petrochemical, energy, food and beverage, aerospace, and wind energy markets. The Water Management Platform segment designs, procures, manufactures, and markets products that provide and enhance water quality, safety, flow control, and conservation.

It offers specification drainage products, flush valves and faucet products, backflow prevention pressure release valves, PEX piping used in nonresidential construction end-markets, and engineered valves and gates for the water and wastewater treatment market under the brand names of Zurn, Wilkins, VAG, GA, Rodney Hunt, and Fontaine.

The stock is trading at 93 times earnings but has also caught a few upgrades recently. The stock has been stuck for the last six months, having only risen 4 percent year-to-date. But is the company’s performance going to improve to drive the share price higher? An examination of the company’s recent performance and discussion of where it is headed can help answer this question.

In the most recent quarter, the company saw net sales increase 5 percent (+4 percent core sales, +2 percent acquisitions, -1 percent impact of foreign currency translation) to $570 million. Income from operations increased 5 percent year-over-year to $79 million or 13.8 percent of sales. Adjusted earnings came in at $120 million, resulting in an adjusted earnings margin of 21 percent. Net income increased 67 percent from the prior year to $40 million while diluted earnings per share from continuing operations was 39 cents. Adjusted earnings per share increased 56 percent from the prior year to 50 cents.

For the year, net sales were $2.082 billion, which was an increase of 4 percent (+3 percent core sales, +1 percent acquisitions). The company saw income from continuing operations increase 10 percent year-over-year to $280 million, or 13.4 percent of sales. Adjusted earnings were $413 million, resulting in an adjusted earnings margin of 19.8 percent. Further, net income from continuing operations was $30 million compared to $55 million in fiscal year 2013. Diluted earnings per share from continuing operations was 29 cents and adjusted earnings per share increased 42 percent from the prior year to $1.39.

CEO Todd A. Adams said in a press release: “We’re pleased with our fourth quarter results in light of some challenging market conditions during the quarter. Core sales growth improved to 4 percent in the quarter, while our adjusted EBITDA margin was 21 percent. Despite the drag from unusually adverse winter weather and the impact of project shipment timing in Water Management, we achieved our adjusted EPS guidance for the fourth quarter and fiscal year. In our Process and Motion Control platform, we are seeing on-going stability in most of our end-markets. Core growth is expected to remain modest in the near term, driven by a lower backlog that impacts the first half of the year, but will be augmented by a full-year contribution from Precision Gear Holdings which we acquired in December 2013.”

He continued: “For the full year, our adjusted EBITDA margin of 25.6 percent increased 70 basis points from last year’s record margin on a 2 percent increase in sales (1 percent core growth) as we continue to drive margin expansion amidst, in total, stable end-markets. Looking ahead, the investments we have made in innovation, globalization and operational excellence driven through the Rexnord Business System gives us confidence in our ability to drive continued long-term growth and strong operating performance in the platform.

“In Water Management, despite the adverse impact of the winter weather and the timing of certain water infrastructure project shipments, core growth was 6 percent in the quarter and 8 percent for the fiscal year. Looking forward, we expect margins to expand meaningfully in fiscal 2015, and we continue to believe we will see significant benefits from a recovering non-residential construction market and from on-going global investment in water infrastructure.”

Looking ahead, the company is expecting for fiscal 2015 to see core growth of +3 percent to +5 percent, incremental adjusted earnings margins of approximately 30 percent, adjusted earnings per share of $1.60 to $1.70, and free cash flow to again exceed adjusted net income. Core sales should grow +2 percent to +4 percent in the first half of fiscal 2015 and +4 percent to +6 percent in the second half of the fiscal year.

For the first quarter, the company sees sales in the range of $500 million to $510 million and adjusted earnings per share in the range of 24 cents to 26 cents. All things considered, Rexnord is chugging a ahead. It is not growing at a rapid clip, but is growing nonetheless. I think this stock is a good long-term buy, but would like to see it pull back 10 percent before pulling the trigger.

Disclosure: Christopher F. Davis holds no position in Rexnord Corp. and has no plans to initiate a position in the next 72 hours. He has a tentative buy rating on the stock and a $35 price target.

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