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Valuation: Regal-Beloit Corporation (RBC) is Defensive but Overvalued

moneyCompany Profile (obtained from Google Finance): Regal Beloit Corporation is a global manufacturer of electric motors and controls, electric generators and controls, and mechanical motion control products. The Company operates in two segments: Electrical and Mechanical. Its electrical products include motors used in commercial and residential heating, ventilation, air conditioning ( HVAC) applications, a full line of alternating current ( AC) and direct current ( DC) commercial and industrial electric motors, electric generators and controls, high-performance drives and controls, and capacitors. Its mechanical products include primarily gears and gearboxes, marine transmissions, automotive transmissions, manual valve actuators, and electrical connectivity devices. In November 2013, Regal Beloit Corporation closed on the acquisition of Cemp, s.r.l.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 7/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $61.21
MG Opinion Overvalued
Value Based on 3% Growth $59.14
Value Based on 0% Growth $34.67
Market-Implied Growth Rate 4.58%
NCAV $1.75
PEmg 17.67
Current Ratio 2.39
PB Ratio 1.57

Balance Sheet – 9/30/2013 

Current Assets $1,717,500,000
Current Liabilities $720,100,000
Total Debt $609,100,000
Total Assets $3,709,300,000
Intangible Assets $1,403,500,000
Total Liabilities $1,638,900,000
Outstanding Shares 45,000,000

Earnings Per Share – Diluted

2013 (estimate) $4.18
2012 $4.65
2011 $3.79
2010 $3.84
2009 $2.63
2008 $3.87
2007 $3.49
2006 $3.28
2005 $2.25
2004 $1.22
2003 $1.00
2002 $1.01

Earnings Per Share – Modern Graham (Calculating EPSmg)

2013 (estimate) $4.08
2012 $3.94
2011 $3.56
2010 $3.44
2009 $3.19
2008 $3.26

Conclusion:

Regal-Beloit Corporation is one of my personal favorites.  The company passes every single requirement of both the Defensive Investor and the Enterprising Investor.  There are stable earnings, dividends, low debt, and everything else an Intelligent Investor would like to see in a company.  However, just like many other companies in today’s market environment, the current price seems slightly overvalued.  EPSmg (normalized earnings) have grown from $3.26 in 2008 to an estimated $4.08 for 2013, and the growth has been pretty consistent over that period, but the market is implying a rate of 4.58% which is a little above what’s been seen.  As a result, Regal-Beloit should be on all the short list of all Defensive Investors and Enterprising Investors for a time when the price dips a little bit and at that time investors should feel comfortable proceeding with further research to determine whether Regal-Beloit is suitable for their individual portfolios.

What do you think?  Do you agree that Regal-Beloit is overvalued?  Is the company suitable for either Defensive Investors or Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Nucor at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill

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