RBC Bearings (RBC) Eyes Growth On Solid Sales Amid Cost Woes

On Nov 6, we issued an updated research report on premium industrial goods firm, RBC Bearings Inc. (NASDAQ:ROLL) . Improving industrial and aerospace sales, as well as increased liquidity will likely boost the company’s near-term results. However, supply-chain setbacks might curb growth.

Let’s dig deeper into the fundamental factors influencing the stock.

Gaining From Solid Industrial & Aerospace Sales

RBC Bearings expects that growth in U.S. manufacturing activity will spur demand for its engineering and bearing products, going forward. A higher than 50 reading in the recent Institute of Supply Management’s Purchasing Managers Index indicates that economic activities are booming in U.S. manufacturing sector. Corporate spending across manufacturing industries is rising at a healthy pace on the back of the December-implemented Tax Cuts and Jobs Act and increased government spending.

The company’s second-quarter fiscal 2019 revenues improved 7.3% year over year, organically. RBC Bearings stated that the upside stemmed from robust industrial and aerospace end-markets’ demand. The company anticipates that sturdier industrial original equipment manufacturers (OEM), as well as aftermarket and distribution demand will drive its industrial revenues.

On the other hand, new contracts, and higher defense and aerospace OEM demand will bolster aerospace sales in the quarters ahead. Notably, RBC Bearings currently anticipates revenue growth of 6.9-8.2% in third-quarter fiscal 2019. Per our estimates, the company’s year-over-year revenue growth is currently pegged at 7.7% and 11.1% for fiscal 2019 (ending March 2019) and 2020, respectively.

Moreover, RBC Bearings reported better-than-expected earnings in the fiscal second quarter. The company stated that this impressive performance was backed by robust revenues, greater operational excellence and reduced tax expenses. These positives will likely continue to drive RBC Bearings’ bottom-line growth trajectory in the quarters ahead. Per our estimates, the company’s year-over-year earnings growth is currently pegged at 22.2% and 15% for fiscal 2019 and 2020, respectively.

We also notice that RBC Bearings has been improving its liquidity on the back of increased cash generation over the past few quarters. The company intends to lower its debt burden, fund new growth-oriented investments, and provide higher returns to shareholders with these proceeds.

Over the past three months, RBC Bearings’ shares have rallied 16.4%, as against the 5.6% loss recorded by the industry it belongs to.

Troubled with Cost Worries

Industrial manufacturing companies like RBC Bearings, Applied Industrial Technologies, Inc. (NYSE:AIT) , Graco Inc. (NYSE:GGG) and Ingersoll-Rand PLC (NYSE:IR) are rife with apprehensions concerning the tariff-related trade war between the United States and other countries, including China. We notice that these import tariffs are resulting in material cost inflation and pulling down the margins of the industrial manufacturing companies. In addition, other issues relating to skilled workforce shortage, flaring up wages, and elevated transportation expenses are major causes of concern for these businesses.

Since the beginning of fiscal 2019, RBC Bearings’ aerospace sales are being hurt due to lower productivity in some manufacturing facilities. Certain supply-chain constraints, like lack of engine availability, unfavorable contract timing and short-term aircraft build rates, depressed productivity in some aerospace plants. These issues might continue to dent RBC Bearings’ revenues in the quarters ahead.

Moreover, on a P/E (TTM) basis, RBC Bearings’ shares look overvalued compared with the industry, with the respective tallies of 31.5x and 17.3x, for the past three-month period.

Notably, the stock is currently trading higher than the median P/E (TTM) multiple for the same time frame.

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