We recently initiated our coverage on Rexnord Corporation (RXN), a well-known mechanical components manufacturer, with an Outperform recommendation.
Why Outperform?
Rexnord specializes in designing and manufacturing process and motion control, and water management products. These products are sold across the globe for use in diversified end markets.
The company has presence in a variety of end markets, including mining, food & beverage, aerospace, non-residential construction and global water infrastructure. Rise of backlog in the non-residential construction market in U.S. and Canada are likely to favor Rexnord in the years to come. The water infrastructure market was boosted from the growing demand for clean water while similar trend of rising demand is noticed in the aerospace industry.
Besides the favorable end markets, acquisitions over time have strengthened Rexnord’s product portfolio and enabled expansion in unexplored markets. Acquired assets of Zurn Plumbing products business in 2007 became the foundation of the company’s Water Management Platform. The recently acquired assets of Micro Precision Gear and LWG Specialised Plumbing Products are expected to boost the company’s business in the civil aerospace industry and expand its Zurn brand products sales in Australia, respectively.
Rexnord has been working towards lowering its financial burden resulting from its debts. In Apr 2013, measures were undertaken that reduced the interest rate on term loans by 75 basis points. A similar action of refinancing term loans has been repeated in Aug 2013. The recent refinancing is anticipated to save $41-$48 million annually in pre-tax interest expenses for Rexnord and lead to earnings per share accretion of $0.25-$0.30.
Talking of Rexnord’s financial performance in the fiscal first quarter 2014, core sales growth was driven by benefits derived from diversified product portfolio, growth initiatives undertaken and improving demands. For fiscal 2014, core sales growth guidance has been raised to 2%-4% while the lower end of the earnings guidance has been raised by $0.02 to $1.12-$1.18.
Over the long-term, Rexnord targets achieving mid-single-digit core growth, 30+% incremental profit margins and free cash flow in excess of net income in the long term.
Other Stocks to Consider
Rexnord Corporation provided a year-to-date return of 20.7% and currently has a $2.0 billion market capitalization. Other stocks to watch out for are AO Smith Corp. (AOS), with a Zacks Rank #1 (Strong Buy) while Plug Power Inc. (PLUG) and EnerSys (ENS), each come with a Zacks Rank #2 (Buy).
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