Regal Beloit Corporation

RBC Details

Regal Beloit Corporation (NYSE: RBC) is engaged in manufacturing and commercializing electric motors, electrical motion controls, and power generation products globally to its Original Equipment Manufacturer (OEM) customers. The company operates in four segments, namely 1) Commercial Systems segment produces AC and DC motors, electronic variable speed controls, fans, and blowers for industrial applications. 2) The Industrial Systems segment manufactures generators, alternators, switchgear, and aftermarket parts for commercial applications. 3) Climate Solutions segment produces small motors, air moving solutions to serve residential and light commercial HVAC businesses. 4) Power Transmission Solution segment manufactures and sells belt and chain drives, gearing, bearings, couplings, hydraulic pumps, and large mechanical products. As of May 21, 2021, its market capitalization stood at USD 5.59 billion.

Upgrade in ESG rating: On May 20, 2021, the company got an Environmental, Social, and Governance (ESG) rating of ‘A’ from MSCI ESG Research LLC, indicating an upgrade from the ‘BBB’ rating last year. In the Environment framework, MSCI mentioned RBC's strong measures to address environmental effects from the air, water, and waste emissions compared to its peer companies.

Q1FY21 Results: The company reported a 10.88% increase in net sales to USD 814.10 million in Q1FY21 (ending April 03, 2021) compared to USD 734.20 million in Q1FY20 (ending March 28, 2020), primarily due to increment in revenue from North America and China regions. The commercial segment contributed 29.11%, the Industrial segment contributed 16.75%, the Climate Solution segment contributed 29.36%, and the Power Transmission Solution segment contributed 24.76% of the net sales during the quarter. The company reported a massive increase of 43.36% in net income to USD 67 million in Q1FY21 compared to USD 46.70 million in Q1FY20. As of April 03, 2021, the company stood at the cash and cash equivalents of USD 566.40 million and long-term debt of USD 786.90 million.

Key Risks: The company earns a major portion of the revenues of the motor businesses from numerous key OEM customers. This exposes it to customer concentration risk to a significant extent, wherein the loss of the whole or a part of the business from such crucial customers can significantly dent its financials. Similarly, on the supply side, the company needs to manage its relationships with its key suppliers to ensure uninterrupted operations.

Outlook: For Q2FY21, the company is expecting its sales growth to be greater than 20%. The company is also estimating its GAAP diluted earnings per share to be in the range of USD 1.50 to USD 1.70.

Valuation Methodology: EV / EBITDA Multiple Based Relative Valuation

(Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

RBC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: RBC's share price has surged by 80.33% in the past twelve months and is currently trading at the higher end of the 52-week range of USD 75.63 to USD 159.64. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 120.34. Considering the significant increase in the stock price in the past twelve months, decent financials, associated risks, and current valuation, we recommend an "Expensive” rating on the stock at the closing price of USD 139.11, up by 1.04% as of May 21, 2021.