Regal Beloit (RBC) Up 0.8% 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 0.8% in that time frame, underperforming 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 its most recent earnings report in order to get a better handle on the important catalysts.

Regal Beloit Q4 Earnings Surpass Estimates, Up Y/Y

Regal Beloit delivered better-than-expected results for the fourth quarter of 2018, with a positive earnings surprise of 7.6%.

The company's adjusted earnings in the reported quarter were $1.41 per share, surpassing the Zacks Consensus Estimate of $1.31. Also, the bottom line increased 22.6% from the year-ago quarter's number of $1.15.

For 2018, the company's adjusted earnings per share were $6.00, above the Zacks Consensus Estimate of $5.91 and roughly 23% above the year-ago tally of $4.88.

Core Sales and Acquisitions Drive Revenues

In the reported quarter, Regal Beloit's net sales were $881.7 million, increasing 7.4% year over year. The improvement was driven by a 5.2% contribution from organic sales growth and 3.9% benefit from acquired assets, partially offset by 1.4% adverse impact of foreign currency translation and 0.4% impact of divested assets.

Also, the top line surpassed the Zacks Consensus Estimate of $874.4 million by 0.84%.

Excluding the impact of divested business, the company's adjusted net sales in the reported quarter were $871.9 million, up 7.7% year over year.

The company 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 $232.2 million, increasing 7.3% year over year. It represented 26.3% of net sales. Organic sales grew 9.4%, offset by forex woes of 1.2% and divestiture impact of 0.9%. Demand was healthy for commercial refrigeration and residential HV AC in North America. International business was weak in the quarter under review.

Commercial and Industrial Systems' revenues, representing 49.5% of net sales, were $436.7 million, up 7.1% year over year. Organic sales in the reported quarter increased 1.3% and acquisitions added 7.7%, partially offset by 1.8% adverse impact of unfavorable movements in foreign currencies. The segment's business flourished in commercial HV, power generation, and oil & gas while it was weak in Asia.

Power Transmission Solutions' revenues, representing 24.2% of net sales, were $212.8 million, up 8.2% year over year. The organic sales growth of 9% was driven by healthy demand for oil & gas, and distribution. Forex woes had an adverse impact of 0.7%.

For 2018, the company's net sales were $3,645.6 million, increasing 8.5% year over year. The top line was roughly in line with the Zacks Consensus Estimate of $3.64 billion.

Gross Margin Improves Y/Y

In the reported quarter, Regal Beloit's cost of sales grew 6.6% year over year to $642 million. It represented 72.8% of net sales versus 73.4% recorded in the year-ago quarter. Gross margin increased 60 basis points (bps) to 27.2%. Operating expenses of $149.9 million increased 7.2% year over year and represented 17% of net sales in the quarter.

Adjusted operating profit was $92.9 million, up 15.8% year over year, while margin expanded 80 bps to 10.7%.

Balance Sheet and Cash Flow

Exiting the fourth quarter of 2018, Regal Beloit had cash and cash equivalents of $248.6 million, reflecting 34.8% growth from $184.4 million recorded in the last reported quarter. Long-term debt increased 2.2%, sequentially, to $1,306.6 million.

Notably, the company repaid $811.4 million of debt during 2018 while raised funds amounting to $900.2 million through debt borrowings.

In 2018, Regal Beloit generated net cash of $362.7 million from operating activities, reflecting year-over-year growth of 24.3%. The company increased the capital investment for purchasing property, plant and equipment by 19% over the year-ago tally to $77.6 million. Free cash flow was $285.1 million, increasing 25.8% from the previous year.

During the year, the company paid dividends totaling $47.2 million to shareholders and repurchased shares worth $127.8 million.

Outlook

For 2019, Regal Beloit anticipates gaining from pricing and solid product portfolio. Adjusted earnings per share are expected to be $6.15-$6.55, reflecting growth from $6.00 in 2018. Organic sales are predicted to increase in a low- to mid-single digit.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, 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.

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.