Rexnord's Growth Prospects Dimmed By Headwinds Woes

We issued an updated research report on machinery company Rexnord Corporation (NYSE:RXN) on Oct 7, 2016. The company engages in manufacturing and supplying process & motion control and water management products worldwide.

Rexnord Corporation has strong fundamentals, supporting growth. However, exposure to risks has restricted its growth momentum in the near term. Below we briefly discuss the company’s tailwinds and headwinds.

We believe that Rexnord’s end-market diversification has a boon for it over time. The company supplies its products to a vast clientele in various industries, including mining, food & beverage, aerospace, non-residential construction and global water infrastructure. In the years ahead, accelerated demand from the non-residential construction, aerospace, and food and beverage end markets of the U.S. will boost the company’s growth prospects.

Also, Rexnord prefers improving profitability by disposing non-core assets and acquisition of meaningful businesses. In first-quarter fiscal 2017 (ended Jun 30, 2016), the company exited its non-strategic RHF product line for the best interests of its shareholders while acquiring Cambridge International Holdings Corporation. Acquired assets in the quarter contributed nearly 1% to revenue growth.

Driven by such positives, Rexnord targets mid-single digit core growth, a 30% incremental profit margin and free cash flow in excess of net income in the long run. Also, adjusted EBITDA incremental margin is expected to be within 30−35% and 20−25% for the Process & Motion Control and Water Management segments, respectively.

However, we believe the positive impacts of the above-mentioned tailwinds are offset by adverse impacts of headwinds faced by Rexnord Corporation. International expansion has exposed the company to risks arising from foreign currency translations and other geopolitical issues. Also, global uncertainties lay an impact on the construction, general industrial, mining and aerospace markets, among others. Any downturns in one or more of these markets could produce an adverse material impact on Rexnord’s businesses.

Moreover, Rexnord faces risks from stiff competition from both larger and smaller companies that offer the same or similar products and services, or those producing different items suited to the same use. The company faces competition from EnerSys (NYSE:ENS) , Schneider Electric (PA:SCHN) SE (OTC:SBGSY) and AO Smith Corp. (NYSE:AOS) .

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