Machinery Stocks

Regal Beloit Corp Valuation – August 2018 $RBC

Company Profile (excerpt from Reuters): Regal Beloit Corporation, incorporated on March 2, 1994, is a manufacturer of electric motors, electrical motion controls, power generation and power transmission products. The Company operates through three segments: the Commercial and Industrial Systems segment, with its principal line of business in medium and large electric motors, power generation products, high-performance drives and controls and capacitors; the Climate Solutions segment, with its principal line of business in small motors, controls and air moving products, and the Power Transmission Solutions segment, with its principal line of business in power transmission gearing, hydraulic pump drives, open gearing and specialty mechanical products which control motion and torque. It sells its products directly to original equipment manufacturers (OEMs), distributors and end users. It operates distribution facilities in Plainfield, Indiana; McAllen, Texas; LaVergne, Tennessee, and Florence, Kentucky, which serve as hubs for its North American distribution and logistics operations.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of RBC – August 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $3,669,543,261 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.24 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 45.61% Pass
6. Moderate PEmg Ratio PEmg < 20 18.69 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.60 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.24 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.29 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $4.53
MG Growth Estimate 10.91%
MG Value $137.39
Opinion Undervalued
MG Grade B
MG Value based on 3% Growth $65.70
MG Value based on 0% Growth $38.52
Market Implied Growth Rate 5.10%
Current Price $84.70
% of Intrinsic Value 61.65%

Regal Beloit Corp qualifies for both the Defensive Investor and the Enterprising Investor. In fact, the company meets all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong financial position. . The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $2.62 in 2014 to an estimated $4.53 for 2018. This level of demonstrated earnings growth outpaces the market’s implied estimate of 5.1% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Regal Beloit Corp revealed the company was trading above its Graham Number of $81.91. The company pays a dividend of $1.02 per share, for a yield of 1.2% Its PEmg (price over earnings per share – ModernGraham) was 18.69, which was below the industry average of 29.32, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-12.92.

Regal Beloit Corp performs fairly well in the ModernGraham grading system, scoring a B.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$12.92
Graham Number $81.91
PEmg 18.69
Current Ratio 2.24
PB Ratio 1.60
Current Dividend $1.02
Dividend Yield 1.20%
Number of Consecutive Years of Dividend Growth 13

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Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2018
Total Current Assets $1,724,300,000
Total Current Liabilities $768,100,000
Long-Term Debt $1,235,100,000
Total Assets $4,634,700,000
Intangible Assets $2,211,700,000
Total Liabilities $2,294,000,000
Shares Outstanding (Diluted Average) 44,100,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $5.68
Dec2017 $4.74
Dec2016 $4.52
Dec2015 $3.18
Dec2014 $0.69
Dec2013 $2.64
Dec2012 $4.64
Dec2011 $3.79
Dec2010 $3.84
Dec2009 $2.63
Dec2008 $3.78
Dec2007 $3.49
Dec2006 $3.28
Dec2005 $2.25
Dec2004 $1.22
Dec2003 $1.00
Dec2002 $1.01
Dec2001 $0.93
Dec2000 $1.61
Dec1999 $1.80
Dec1998 $2.02

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $4.53
Dec2017 $3.69
Dec2016 $3.15
Dec2015 $2.64
Dec2014 $2.62
Dec2013 $3.56
Dec2012 $3.93
Dec2011 $3.55
Dec2010 $3.42
Dec2009 $3.17
Dec2008 $3.23
Dec2007 $2.72
Dec2006 $2.14
Dec2005 $1.47
Dec2004 $1.11
Dec2003 $1.12
Dec2002 $1.28

Recommended Reading:

Other ModernGraham posts about the company

Regal Beloit Corp Valuation – February 2017 $RBC
5 of the Worst Stocks to Invest In – December 2016
Regal Beloit Corp Valuation – August 2016 $RBC
5 Speculative and Overvalued Companies to Avoid – June 2015
Regal-Beloit Corporation Analysis – 2015 Update $RBC

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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