RBC Bearings (ROLL) Raises Overall View, Risks Subsist - Analyst Blog

On Dec 17, 2014, we issued an updated research report on premium industrial goods firm RBC Bearings Inc. (ROLL). The Oxford-based firm manufactures and distributes plain, roller and ball bearings. These bearings, apart from aiding the reduction of damage and energy loss, also enable proper power transmission in majority of machines and mechanical systems. However, being a multinational company, RBC Bearings is exposed to several business risks within the industry.

Bullish Factors

In the second quarter of fiscal 2015, RBC Bearings reported adjusted earnings of 70 cents per share that increased 9.4% year over year.  Revenues came in at $112.6 million, 10.4% higher than the year-ago tally. The rise in earnings and revenue was driven by secure growth of several prominent economies around the world, especially Europe. Also, global construction, mining, oil & gas markets reported consistently higher demand for RBC Bearing's OEM products. Such favorable market conditions are expected to drive the company's revenue and margins in the upcoming quarters.

Moreover, over the years, the company has closed numerous meaningful acquisitions in order to expand its business, thus boosting its inorganic growth. These acquisitions are expected to contribute roughly $25 million annually, going forward. The company also plans further acquisitions in sync with its corporate strategies.

Further, RBC Bearings remains committed toward rewarding its shareholders through dividend payments and shares repurchase. In the first half of fiscal 2015, the company paid $46 million as dividends, while repurchasing shares worth $4.7 million. These rewards are reflective of the company's strong cash position. In the near future, the company intends to use the excess cash for expansion and development of its existing businesses. The company has planned capital spending of $14−$17 million for fiscal 2015.

Bearish Outcomes

Despite healthy growth prospects, RBC Bearings faces certain problems in trade. The company operates in various regions outside the U.S., like Mexico, France, Switzerland, China and England. As a result, it is exposed to foreign currency fluctuation risks. Moreover, the company's operations in diverse nations expose it to various geo-political, social and economical risks.

Furthermore, RBC Bearings generates a huge proportion of its revenues from select customers. In fiscal 2014, the company generated roughly 30% of the total revenue from its top 10 customers. Consequently, the company is susceptible to concentration risks.

Moreover, RBC Bearings operates in a highly competitive industry and faces constant risks of loosing its market share. Also, as steel is the main raw material for production of bearings, its prices play an important role in determining the total cost. In situations of rising steel prices, it becomes difficult for the company to maintain its margins.

In fiscal second-quarter 2015, RBC Bearings' cost of sales and selling, general and administrative (SG&A) expenses increased 18.6% and 8.03% year over year, respectively. Operating margin decreased 485 basis points (bps) year over year. Thus, sudden changes in prices of core products such as steel increases the operating expenses of RBC Bearings and adversely affects its margins. Furthermore, the company's backlog declined 2% year over year to $217.9 million at the end of the first half of fiscal 2015.

Considering the overall picture, it is impossible to state whether the company would beat the revenues and earnings estimates in the upcoming quarters. With a market capitalization of $1.48 billion, RBC Bearings currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks worth considering in the industry include Blount International Inc. (BLT), Middleby Corp. (MIDD) and Sun Hydraulics Corp. (SNHY). All the three stocks sport a Zacks Rank #1 (Strong Buy).