Rexnord's Long-Term Potential Solid, Runs Near-Term Risks

We issued an updated research report on Rexnord Corporation RXN on Jun 24, 2016. The company is recognized for its process & motion control and water management products. Although the company's long-term growth potential is exposure to certain near-term risks might restrict its growth momentum.

Below, we briefly discuss the tailwinds and headwinds for Rexnord Corporation.

Growth Drivers

End-Market Diversification: One of the most striking features of Rexnord is its vast clientele in diversified end-markets including mining, food & beverage, aerospace, non-residential construction and global water infrastructure.

Long-Term Targets: We believe that Rexnord is well positioned to benefit from the accelerated demand from non-residential construction markets in the U.S. Also, increasing demand for clean water and water infrastructure will support the company's water management business. In the long term, the company targets mid-single digit core growth, a 30% incremental profit margin and free cash flow in excess of net income. Adjusted EBITDA incremental margin is expected within 30−35% and 20−25% for the Process & Motion Control and Water Management segments, respectively.

Inorganic Growth: Over time, Rexnord has benefited from assets acquired for penetrating into unexplored markets and expanding its product lines. In fiscal 2016, acquired assets contributed nearly 1% to revenue growth. In Apr 2016, the company decided to exit its non-strategic RHF product line for the best interest of its shareholders, while in May 2016, it agreed to acquire Cambridge International Holdings Corporation.

Near-Term Headwinds

Risks Associated with International Operations: International expansion of businesses has exposed Rexnord to risks arising from foreign currency translations and other geopolitical issues. In fiscal 2016, adverse foreign currency movements lowered revenues by 4%.

Relation to Global Uncertainties: Difficult macro conditions might influence activities in the construction, general industrial, mining and aerospace markets, among others. Any downturns in one or more of these markets could produce an adverse material impact on Rexnord's businesses. For fiscal 2017, the company anticipates a decline of low-single digit in the U.S. & Canada Industrial Distribution end market and mid-double digits in global process industries.

Other Headwinds: Rexnord is also exposed to risks arising from stiff competition from both larger and smaller companies that offer the same or similar products and services, or those producing different items for the same use.

Conclusion

Rexnord Corporation currently carries a Zacks Rank #3 (Hold). We believe the abovementioned pros and cons clearly justify the company's investment value.

However, there are certain stocks in the machinery industry that have been performing better than Rexnord and have gained high investment value. They include SPX FLOW, Inc. FLOW, Eaton Corporation plc ETN and EnerSys ENS. While SPX FLOW sports a Zacks Rank #1 (Strong Buy), both Eaton Corporation and EnerSys carry a Zacks Rank #2 (Buy).

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