It has been about a month since the last earnings report for Regal Beloit (RBC - Free Report) . Shares have lost about 1.8% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Regal Beloit due for a breakout? 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.
Regal Beloit Beats Q3 Earnings Estimates, Lowers View
Regal Beloit delivered better-than-expected results for the third quarter of 2019, with earnings surpassing estimates by 1.5%. The company reported impressive results after its earnings lagged estimates by 6.75% in the second quarter of 2019.
Adjusted earnings in the reported quarter were $1.35 per share, surpassing the Zacks Consensus Estimate of $1.33. However, the bottom line declined 13.5% from the year-ago quarter’s $1.56 on weak sales performance and a fall in margins.
Core Sales, Divestments and Forex Woes
In the reported quarter, Regal Beloit’s net sales were $772.3 million, declining 16.5% year over year. Organic sales in the quarter fell 9.6%, while forex woes and divestments had adverse impacts of 0.7% and 6.2%, respectively.
Further, the top line lagged the Zacks Consensus Estimate of $825.4 million by 6.4%.
Excluding the impact of divested businesses, the company’s adjusted net sales in the reported quarter were $771.4 million, down 10.4% year over year.
Regal Beloit’s reports results under three segments — Climate Solutions, Commercial and Industrial Systems, and Power Transmission Solutions. The quarterly segmental results are briefly discussed below:
Revenues from Climate Solutions totaled $230.9 million, declining 9.6% year over year. It represented 29.9% of net sales. The results were adversely impacted by an organic sales decline of 4.8%, forex woes of 0.2% and divestiture impact of 4.6%. Notably, organic performance suffered from mild weather, headwinds related to residential HVAC, OEM destocking, weak commercial refrigeration business and other issues.
Commercial and Industrial Systems’ revenues, representing 46.4% of net sales, were $358.6 million, down 22.4% year over year. Organic sales in the reported quarter declined 12.7%, while divestments resulted in an adverse impact of 8.6%. Also, forex woes lowered sales by 1.1%.
Organic sales in the quarter suffered from weakness in the commercial HVAC market and industrial demand in China. Also, issues related to the pool pump market in North America and unfavorable timings of power generation projects played spoilsport.
Power Transmission Solutions’ revenues, representing 23.7% of net sales, were $182.8 million, down 12% year over year. Organic sales dipped 9.3% due to weakness in beverage, oil & gas, and agriculture end markets, partially offset by favorable business in the renewable energy market. Forex woes and divestments had adverse impacts of 0.6% and 2.1%, respectively.
In the reported quarter, Regal Beloit’s cost of sales declined 16.5% year over year to $570.4 million. It represented 73.9% of net sales versus 73.8% recorded in the year-ago quarter. Gross margin declined 10 basis points (bps) to 26.1%. Operating expenses of $129.1 million dipped 16.7% year over year and represented 16.7% of net sales in the quarter.
Adjusted operating profit was $81.3 million, down 18.5% year over year, while margin declined 110 bps to 10.5%. Interest expenses in the quarter were down 1.5% year over year to $13.5 million.
Adjusted effective tax rate in the quarter was 16.3% versus 20.2% in the year-ago quarter.
Balance Sheet and Cash Flow
Exiting the third quarter of 2019, Regal Beloit had cash and cash equivalents of $293 million, reflecting 0.6% growth from $291.3 million recorded in the last reported quarter. Long-term debt declined 1.8% sequentially to $1,200.3 million.
In the third quarter, Regal Beloit generated net cash of $140.6 million from operating activities, reflecting year-over-year growth of 32.6%. The company increased capital investment for purchasing property, plant and equipment by 12.8% over the year-ago figure to $21.1 million. Free cash flow was $119.5 million in the quarter versus $87.3 million in the year-ago quarter.
During the third quarter of 2019, the company paid out dividends totaling $12.6 million to shareholders and repurchased shares worth $94.2 million.
For 2019, the company lowered its adjusted earnings guidance to $5.45-$5.55 per share from previously stated $5.50-$5.80. The mid-point of the revised projection reflects a decline of 2.7% from the earlier mid-point. The company believes that prevailing headwinds — a slowdown in Asia, uncertainties in global trade, an industrial slowdown in the
United States and excess channel inventories — will affect its performance. Cost-out activities will be advantageous.
Organic sales are predicted to decline in mid-single digits versus a low to mid-single-digit fall mentioned earlier. Interest expenses (net) are predicted to be $49 million.
Capital expenditure is predicted to be $90 million and free cash flow is likely to be more than 115% of adjusted net income (marking an increase from the previously stated figure). Adjusted effective tax rate will likely be 19.5%.
How Have Estimates Been Moving Since Then?
Estimates review followed a downward path over the past two months.
At this time, Regal Beloit has an average Growth Score of C, a grade with the same score on the momentum front. However, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.
Regal Beloit has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.