Rexnord's Diversification & Products to Aid Amid Coronavirus
We have issued an updated research report on Rexnord Corporation RXN on Oct 1.
The Milwaukee, WI-based company manufactures and provides water management, and process and motion control products.
The company belongs to the Zacks Manufacturing – Electronics industry, which in turn comes under the ambit of the Zacks Industrial Products sector. There are a number of factors that are influencing IDEX’s prospects. The important factors are briefly discussed below.
Multiple Tailwinds: Rexnord has a solid customer base in various end markets, including non-residential construction, food & beverage, mining and global water infrastructure. In addition, the company’s solid product offerings (including couplings, gears, mechanical seals, engineered valves and others), investments in innovation, focus on operational execution, digital transformation and debt reduction are its boons.
Also, Rexnord has been benefiting — in the form of reduced structural costs and facility footprint as well as restricted capital expenditure — from its supply-chain optimization and footprint-repositioning programs (“SCOFR”).
Rewards to Shareholders: The company is committed to rewarding shareholders handsomely through dividend payments and share buybacks. Though it continues to pay out dividends in the pandemic-stricken environment, the company has temporarily suspended its share buyback activities, which it might consider resuming in the second half of calendar 2020.
Notably, the company paid out dividends totaling $9.6 million in the quarter ended Jun 30, 2020. Its quarterly dividend rate is presently 8 cents per share. Also, the company received its board of directors’ approval, in January 2020, to increase the share buyback program to $300 million.
We believe that a healthy cash flow position will help it reward shareholders, going forward. It expects free cash flow to be in excess of net income in the last three quarters of calendar 2020. Notably, a year-over-year increase of 198.5% in free cash flow has been recorded in the June-ended quarter.
Buyouts: The company believes in enhancing product lines, expanding market share and boosting growth opportunities through acquisitions. It is worth mentioning here that acquisitions/divestments boosted Rexnord’s sales growth by 1% in the June-ended quarter.
In January, Rexnord acquired Just Manufacturing Co. The acquisition has added more vigor to the company’s Water Management segment.
Pandemic Woes: The company’s top line suffered from the pandemic-related downturn caused in the end markets in the June-ended quarter of 2020. It is worried about the adverse impacts of the pandemic for the rest of the calendar year.
For the quarter ended in September 2020, the company expects sales to decrease by 12-17% year over year.
Product Line Simplification: These actions are anticipated to bode well for Rexnord in the long term. However, its impact on sales in the past few quarters was not desirable and this trend might continue in the near term as well.
In the June-ended quarter, the product line simplification actions hurt Rexnord’s Process and Motion Control’s sales by 190 basis points (bps) year over year. Also, a similar impact of 230 bps was witnessed in the March-ended quarter of 2020.
Forex Woes and Peers: Rexnord carries out its operations in multiple countries, including the United States, Europe and Canada.
International diversification has exposed the company to macroeconomic challenges, unfavorable movements in foreign currencies, local competitive pressure and geopolitical issues. Forex woes adversely impacted the company’s June-ended quarter sales by 1% year over year.
The company faces competitive pressures from some players in the industry, including Regal Beloit Corporation RBC, SPX FLOW, Inc. FLOW and Eaton Corporation plc ETN.
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