This company is a play on the aging infrastructure in this country. It beat analysts’ estimates by a penny last quarter. Shares have recently receded, providing a buying opportunity.
Rexnord (RXN)
from The Complete Investor
Rexnord (RXN) is a leading U.S. maker of power transmission and water management products. Through its Process and Motion Control segment, accounting for around 60% of sales, Rexnord makes and sells high-quality industrial bearings, gears, and couplings along with aerospace bearings and seals. These are in demand in complex systems where smooth and reliable performance is critical and downtime is costly.
Beyond initial sales, typically to OEMs (original equipment manufacturers, which buy parts from outside companies to use in their own products), Rexnord also can count on providing replacement parts to a sizable aftermarket. This results in relatively predictable replacement cycles and recurring revenues.
The remaining 40% of sales are in water management, with Rexnord a leading provider of drainage systems, control gates, valves, and other products that improve water quality, safety, flow control, and conservation.
Aging and outdated U.S. water infrastructure will be a big part of major infrastructure spending needed to keep the country competitive. On a smaller scale as well, every building and home needs ready access to water, and Rexnord will benefit from rising demand for water management products driven by new construction and the retrofitting of existing structures.
In fiscal 2014 (ended in March 2014), Rexnord had sales of $2.1 billion. Two-thirds were generated domestically, with Europe accounting for around one-fifth of sales and the balance coming from other countries. The relatively low exposure to Europe is a plus.
Rexnord shares have lagged because of low commodity prices and some headwinds in end markets, and growth may hover in the mid-single digits this year. But low commodity prices won’t persist much longer, and as they recover, the company’s market-leading position in most of its products should push growth higher.
The PEG is a reasonable 1.1, and free cash flow yield is about 8%. There’s no dividend, but the board of directors recently approved a $200 million buyback program. Management also has stated that Rexnord is exploring potential acquisitions to boost growth. Buy Rexnord up to $29.
Stephen Leeb, PhD. and Genia Turanova, The Complete Investor, www.completeinvestor.com, 866-833-2070, April 2015