Rexnord: Zacks’ Bear of the Day Play

Rexnord Corporation (RXNFree Report) is an industrial company that is still seeing declining earnings. This Zacks Rank #5 (Strong Sell) is expected to see a double digit earnings decline in fiscal 2017.

Rexnord is an industrial manufacturer in two areas: Process & Motion Control and Water Management. It makes engineered drive systems, seals, couplings and conveyor systems which you would find in the mining, energy and food & beverage industries. It also makes valves, fittings, faucets and drains for the construction industry and municipalities.

Rexnord is headquartered in Milwaukee and has 8,000 employees worldwide.

Moving Some Jobs to Mexico

If Rexnord sounds familiar to you, that’s because it was recently in the news because it decided to close a bearings-making plant in Indianapolis that employed 300 workers and move the business to Mexico. The plant was located just a mile from the Carrier plant which was the subject of tweets in 2016 by Donald Trump.

But these jobs, apparently, won’t be saved.

In December 2016, the union and the company reached a severance agreement which will pay $2,000 plus one week of salary for every year they spent at the company. Workers will also get free health insurance for 6 months.

A Public Offering to Raise Cash

After the election results, shares of Rexnord moved sharply higher as investors bought up all the industrial names they thought could benefit from Republican policies.

Rexnord decided to take advantage of this move. On Dec 1, Rexnord announced the pricing of a public offering of 7 million shares.

The company raised $390.1 million which it intends to use to pay a portion of its outstanding term loan indebtedness and for general corporate purposes.

Lowered Full Year Guidance

On Nov 2, Rexnord reported fiscal second quarter results and met on the Zacks Consensus Estimate of $0.38.

Net sales were only up 1% year over year to $491 million. Core sales fell 2%.

It described the demand environment as “challenging.”

Rexnord lowered its fiscal year 2017 EPS to a range of $1.32 to $1.38 due to ongoing deceleration of project schedules in the Middle East water infrastructure markets and a more conservative outlook for growth in the nonresidential construction and process industry end markets.

As a result, the analysts have been cutting estimates.

4 were cut for fiscal 2017 in the last 60 days which pushed the Zacks Consensus Estimate down to $1.32 from $1.52 in the last 3 months.

One analyst, however, recently got a bit more bullish and actually raised the estimate in the last week. But that wasn’t enough to change the consensus estimate.

Analysts still see a 10.4% earnings decline in fiscal 2017.

2018 is looking a little better with earnings growth of 6.6%, but analysts have also been cutting those estimates so it remains to be seen if the growth will hold.

Getting Ahead of Themselves?

Shares are up 6.8% in the last 3 months as investors jumped into these industrial names after the election.

But the earnings story hasn’t yet changed and it could be 12 to 24 months before any infrastructure or other stimulus or tax cuts really show up in the fundamentals.

While the shares have attractive valuations, they aren’t dirt cheap either. They have a forward P/E of 15.5.

If you really want to invest in this industry, you might want to consider AO Smith (AOSFree Report) or Eaton Corporation (ETNFree Report) as both have better Zacks Ranks. AOS is a Zacks Rank #2 (Buy) and ETN is a Zacks Rank #3 (Hold).

So Where Are the Profitable Trades?

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