Why is Regal Beloit (RBC) up 3% since its last earnings report?

It’s been a month since Regal Beloit’s (RBC) last reported earnings, with shares up about 3% in that time, outperforming the S&P 500.

Will the recent positive trend continue into its next earnings release, or is Regal Beloit headed for a pullback? Before we dive into how investors and analysts have reacted recently, let’s take a quick look at the latest earnings report to better understand the important factors.

Regal Beloit Tops in Q2 Results, Provides Solid 2021 Outlook.

Regal Beloit delivered impressive results for the second quarter of 2021. Its earnings topped estimates by 11.76% and sales by 7.87%.

Adjusted earnings per share for the reported quarter were $2.28, surpassing the Zacks Consensus Estimate of $2.04. Net income increased 140% from 95 cents in the prior-year quarter, driven by improved sales and margins.

In the first quarter, Regal Beloit announced it had signed an agreement with Rexnord Corporation to combine its Process and Motion Control business. The transaction is expected to close in the second half of 2021. Adjusted earnings before interest, taxes, depreciation and amortization in 2022 are expected to exceed $1 billion.

Revenue details

For the quarter, Regal Beloit net sales were $886.9 million, up 39.9% year-over-year. Organic sales in the reported quarter increased by 37.2%, and changes in currency exchange rates benefited the company by 2.7%.

Improvements in industrial markets lifted quarterly results. Along with that, strength in material handling; heating, ventilation and air conditioning; commercial refrigeration; pool pumps and other markets provided tailwinds.

Additionally, revenue surpassed the Zacks Consensus Estimate of $822 million.

Regal Beloit reports results in four segments – Climate Solutions, Commercial Systems, Industrial Systems and Power Transmission Solutions. Below is a brief overview of the segments:

Climate Solutions revenues totaled $257.3 million, up 44.4% year-over-year. This represented 29% of net sales. Results were driven by organic sales growth of 43.4% and foreign currency translation had a positive impact of 1%.

Commercial Systems revenue, representing 30.4% of net sales, was $269.3 million, up 53.1% year over year. Organic sales in the reported quarter increased 49.6%, and foreign currency movements impacted earnings by 3.5%.

Industrial Systems generated revenue of $145.2 million, up 20.4% year-over-year. This represented 16.4% of net sales for the reported quarter. Organic sales increased 15.2% year-over-year, and currency effects benefited the company by 5.2%.

Power Transmission Solutions revenue, representing 24.2% of net sales, was $215.1 million, up 34.9% year over year. Organic sales increased 33.1%, and currency effects had a positive impact of 1.8%.

Picture in the margin

During the reported quarter, Regal Beloit’s cost of sales increased 37% year over year to $635.4 million. This represented 71.6% of net sales compared to 73.1% in the prior-year quarter. Gross profit increased 47.7% year over year to $251.5 million, while margin increased 150 basis points (bps) to 28.4%. Operating expenses of $140.2 million increased 15.3% year over year and represented 15.8% of net sales during the reported quarter.

Adjusted operating income was $123.8 million, up 108.1% year-over-year, while margin increased 460 basis points to 14%. Interest expense in the second quarter increased 8.5% year-over-year to $11.5 million. The adjusted effective tax rate for the reported quarter was 19.2%, compared to 22.4% in the year-ago quarter.

Balance sheet and cash flow

Coming out of the second quarter of 2021, Regal Beloit had cash and cash equivalents of $618.5 million, reflecting an increase of 9.2% compared to $566.4 million recorded in the last reported quarter. Long-term debt increased 0.3% sequentially to $789 million.

In the second quarter, Regal Beloit generated $87.1 million of net cash from operations, reflecting year-over-year growth of 0.2%. The company’s capital investments in the purchase of real estate, plants and equipment increased by 43.2% compared to the previous year to USD 13.6 million. Free cash flow was $73.5 million, down 5% from $77.4 million in the prior-year quarter.

Free cash flow (as a percentage of adjusted net profit) was 90.3% in the second quarter of 2021, compared to 255.4% in the same quarter last year.

In the second quarter, the company paid shareholders dividends totaling $12.2 million. It is worth noting that it refrained from buying back its shares in the reported quarter.

Perspectives

The company expects to benefit from end-market strength and margin improvement in 2021. Adjusted earnings per share for the year are expected to be $8.70-$9.00, suggesting year-over-year growth of 53% (at the midpoint). Teen sales are expected to increase year-over-year.

Capital expenditures for 2021 are expected to be $60 million (up from $57 million previously reported), the effective tax rate is expected to be 21% (maintained), and net interest expenses are expected to be $28 million (maintained). Free cash flow (as a percentage of adjusted net income) is likely to be over 100% (maintained).

How have estimates changed since then?

Over the past month, investors have witnessed an upward trend in estimate revisions. The consensus estimate has moved 17.29% due to these changes.

VGM results

Regal Beloit currently has a below-average Growth Score of D, a grade of the same on the momentum front. However, the stock has been given a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has a Composite VGM Score of C. If you’re not focused on a single strategy, this score should interest you.

Perspectives

The stock’s estimates are trending upwards, and the magnitude of these revisions looks promising. It’s no surprise that Regal Beloit has a Zacks Rank #2 (Buy). We expect the stock to deliver above-average returns over the next few months.

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