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Regal Beloit (RBC) Up 12.7% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Regal Beloit (RBC). Shares have added about 12.7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Regal Beloit due for a pullback? 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 catalysts.

Regal Beloit Beats Q1 Earnings Estimates, Withdraws View

Regal Beloit delivered better-than-expected results for the first quarter of 2020, with earnings surpassing estimates by 27.2%. This is the company’s third consecutive quarter of impressive results.

Adjusted earnings in the reported quarter were $1.31 per share, surpassing the Zacks Consensus Estimate of $1.03. However, the bottom line declined 6.4% from the year-ago quarter’s figure of $1.40 on weak sales performance and a fall in operating margins.

Revenue Details

In the reported quarter, Regal Beloit’s net sales were $734.2 million, declining 14% year over year. Organic sales in the quarter fell 9.8%, while forex woes and divestments had adverse impacts of 0.7% and 3.5%, respectively.

However, the top line surpassed the Zacks Consensus Estimate of $730 million by 0.5%.

Excluding the impacts of divested businesses, the company’s adjusted net sales in the reported quarter were $734.2 million, down 10.5% year over year.

Regal Beloit reports results under four segments — Climate Solutions, Commercial Systems, Industrial Systems and Power Transmission Solutions. The quarterly segmental results were adversely impacted by the pandemic. A brief discussion is provided below:

Revenues from Climate Solutions totaled $210.1 million, declining 20.2% year over year. It represented 28.6% of net sales. The results were adversely impacted by an organic sales decline of 14.8%, forex woes of 0.4% and divestiture impact of 5%.

Commercial Systems’ revenues, representing 27.2% of net sales, were $199.4 million, down 17.7% year over year. Organic sales in the reported quarter declined 12.5%, while divestments resulted in an adverse impact of 4.5%. Also, forex woes lowered sales by 0.7%.

Industrial Systems generated revenues of $129.6 million, reflecting a year-over-year decline of 6.2%. It represented 17.6% of the quarter’s net sales. Organic sales decreased 4.5% year over year, forex woes hurt results by 1.7%.

Power Transmission Solutions’ revenues, representing 26.6% of net sales, were $195.1 million, down 7.2% year over year. Organic sales dipped 4.2%. Forex woes and divestments had adverse impacts of 0.5% and 2.5%, respectively.

Margin Picture

In the reported quarter, Regal Beloit’s cost of sales declined 14.3% year over year to $530.9 million. It represented 72.3% of net sales versus 72.5% recorded in the year-ago quarter. Gross profit decreased 13.3% year over year to $203.3 million, while margin increased 20 basis points (bps) to 27.7%. Operating expenses of $131.8 million increased 26.7% year over year and represented 18% of net sales in the quarter.

Adjusted operating profit was $79.2 million, down 11.5% year over year, while margin declined 10 bps to 10.8%. Interest expenses in the quarter were down 14.7% year over year to $11.6 million.

Adjusted effective tax rate in the quarter was 22.1% versus 20.7% in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the first quarter of 2020, Regal Beloit had cash and cash equivalents of $604.5 million, reflecting 82.4% growth from $331.4 million recorded in the last reported quarter. Long-term debt increased 20% sequentially to $1,364.3 million.

During the quarter, the company’s net borrowings under revolving credit facility totaled $227.1 million.

In the first quarter, Regal Beloit generated net cash of $102.7 million from operating activities, reflecting year-over-year growth from $18.3 million in the year-ago quarter. The company’s capital investment for purchasing property, plant and equipment decreased by 46% over the year-ago figure to $10.9 million. Free cash flow was $91.8 million in the quarter versus ($1.9) million in the year-ago quarter.

During the first quarter of 2020, the company paid out dividends totaling $12.2 million to shareholders and repurchased shares worth $25 million.

Outlook

In the quarters ahead, the company anticipates gaining from its cost-control measures that are essentially implemented to deal with the pandemic. The actions include furloughs, lowering of discretionary spending, reduction in compensation and refraining from hiring new people.

Also, the company’s existing restructuring efforts and reorganization actions (80/20) might aid.

The company is wary about the impacts of the pandemic on its near- and mid-term demand for products, its manufacturing activities and supply chain. For now, it withdrew adjusted earnings per share and revenue growth projections for 2020.

The company noted that it suspended its share buyback program for now.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -26.38% due to these changes.

VGM Scores

At this time, Regal Beloit has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Regal Beloit has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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