Why Is Regal Beloit (RBC) Down 6.1% Since Last Earnings Report?

A month has gone by since the last earnings report for Regal Beloit (RBC). Shares have lost about 6.1% in that time frame, outperforming 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 catalysts.

Regal Beloit Beats Q4 Earnings Estimates, Ups View

Regal Beloit reported lackluster fourth-quarter 2019 results due to declining income and revenues. However, the bottom line surpassed estimates by 0.8%. The company reported relatively weak results after its earnings surpassed estimates by 1.5% in the third quarter of 2019.

Adjusted earnings were $1.25 per share, surpassing the Zacks Consensus Estimate of $1.24. However, the bottom line declined 4.6% from the year-ago quarter’s $1.31 on weak sales and falling margins.

Adjusted earnings in 2019 were $5.49 per share, down 2.7% from $5.64 in 2018. The decline was primarily attributable to lower revenues.

Core Sales, Divestments and Forex Woes

In the reported quarter, Regal Beloit’s net sales were $738.2 million, declining 16.3% year over year. Organic sales fell 9.3%, while forex woes and divestments had adverse impact of 0.5% and 6.5%, respectively.

In 2019, Regal Beloit’s net sales were $3,238 million, declining 11.2% year over year. Organic sales fell 5.7%, while forex woes and divestments had adverse impact of 1.1% and 5.3%, respectively.

Further, the top line lagged the Zacks Consensus Estimate of $742 million by 0.5%.

Excluding the impact of divested businesses, the company’s adjusted net sales in the reported quarter were $738 million, down 9.8% year over year. Its full-year adjusted net sales were $3,185.2 million, down 5.8%.

Per the latest reporting structure, Regal Beloit’s reports results under four segments — Commercial Systems, Industrial Systems, Climate Solutions and Power Transmission Solutions. The quarterly segmental results are briefly discussed below:

Commercial Systems’ revenues, representing 27.4% of net sales, were $202 million, down 26.1% year over year. Organic sales in the reported quarter declined 10.4%, while divestments resulted in an adverse impact of 15.1%. Also, forex woes affected sales by 0.6%.

Organic sales suffered from weakness in North American general industry along with continued inventory reduction in the pool pump market in North America. Also, the effect of 80/20 account pruning played spoilsport.

Industrial Systems’ revenues, representing 18.7% of net sales, were $138 million, down 15.6% year over year. Organic sales declined 14.2%, while divestments and forex woes resulted in an adverse impact of 0.7%.

Decline in organic sales was primarily attributable to trade uncertainties in North America and China, and delays in power generation project due to end market overcapacity along with the aftermath of 80/20 account pruning. Also, downturn of oil and gas sectors played spoilsport.

Revenues from Climate Solutions totaled $206.4 million, down 11.1% year over year. It represented 28% of net sales. Results were adversely impacted by an organic sales decline of 6.5%, forex woes of 0.2% and divestiture impact of 4.4%. Organic performance suffered from mild weather, headwinds related to residential HVAC, OEM destocking and 80/20 account pruning. However, the weak performance was partially offset by increasing demand in Asia-Pacific.

Power Transmission Solutions’ revenues, representing 26% of net sales, were $191.8 million, down 9.9% year over year. Organic sales dipped 7.2% due to weakness in the industrial distribution channel, backed by soft performance in upstream and midstream oil & gas sectors. However, the decline was partially offset by robust demand of renewable energy. Forex woes and divestments had adverse impacts of 0.4% and 2.3%, respectively.

Margin Picture

In the reported quarter, Regal Beloit’s cost of sales declined 14.6% year over year to $548 million. It represented 74.2% of net sales, up from 72.8%. Gross profit declined from $239.7 million to $190.2 million with respective margins of 27.2% and 25.8%. Operating expenses of $128.5 million dipped 14.3% and represented 17.4% of net sales in the quarter.

Adjusted operating profit was $77.5 million, down 11.1% year over year, while margin declined 10.7% to 10.5%. Interest expenses in the quarter were down 12.6% to $12.5 million.

Adjusted effective tax rate in the quarter was 22.2% compared with 21% in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the fourth quarter, Regal Beloit had cash and cash equivalents of $331.4 million, up 33.3% from $248.6 million recorded at the end of 2018. Long-term debt declined 13% to $1,136.9 million from the year-ago quarter.

In 2019, Regal Beloit generated net cash of $137.3 million from operating activities, reflecting year-over-year growth of 22.2%. The company decreased capital investment for purchasing property, plant and equipment by 18% over the year-ago figure to $15.1 million. Free cash flow was $122.2 million in the reported quarter, up from $94 million.

Shareholder Friendly Policies

During the fourth quarter, the company paid out dividends totaling $12.3 million to shareholders and repurchased shares worth $15 million.

The company purchased 180,763 shares worth $15 million in the fourth quarter while it purchased 2,194,545 shares worth $165 million in 2019.

Outlook

For 2020, the company expects adjusted earnings to be in the range of $5.65-$6.05 per share, reflecting year-over-year growth of 6.6% at the mid-point. The company believes that consistent profitability from differentiated products and services with the current re-segmentation is likely to have positive impact on the performance. The 80/20 account pruning effect will be advantageous.

How Have Estimates Been Moving Since Then?

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

VGM Scores

At this time, Regal Beloit has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, 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 A. 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. Notably, Regal Beloit has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.