Recently, REGAL-BELOIT CORPORATION (NYSE:RBC) shares have experienced a significant drop from $84 in the middle of May to only $64.50 at the time of writing. While Citigroup downgraded the stock from “neutral” to “sell,” Credit Suisse and Barrington Research upgraded the stock to “outperform.” Investment gurus including Chuck Royce and Joel Greenblatt both reduced their holding in the company significantly as of March 2013. Is Regal Beloit a buy or a sell now? Let’s find out.
Consistent growth and conservative capital structure
REGAL-BELOIT CORPORATION (NYSE:RBC) is considered one of the world’s leading makers of electric motors, generators and controls products, operating in two main business segments: Electrical and Mechanical. The majority of its operating income, $273.7 million, or 87.5% of the total operating income, was generated from the Electrical segment while the Mechanical segment contributed more than $39 million in profits.
In the past four years, REGAL-BELOIT CORPORATION (NYSE:RBC) has experienced consistent growth in both top line and bottom line. Revenue increased from nearly $1.83 billion in 2009 to nearly $3.17 billion in 2012 while the net income rose from $95 million to $196 million during the same period.
What I like about the business is its cash flow generating capability. In the past ten years, the company produced consistent positive free cash flow. In 2012, the operating cash flow was $352 million and the free cash flow was $269 million.
Moreover, the company employed conservative capital structure in its operations. As of March 2013, it had $2 billion in equity, $412 million in cash and $823 million in both long and short-term debt. Because the company has grown partly due to acquisition activities, it booked a huge amount in goodwill and intangible assets of more than $1.43 billion.
The cheapest among its peers
At $64.50 per share, the company is worth around $2.9 billion on the market. The market values REGAL-BELOIT CORPORATION (NYSE:RBC) at 7.4 times its trailing earnings before interest, taxes, depreciation and amortization, or EBITDA. The dividend yield sits at 1.3%.
Compared to its peers including ABB Ltd (ADR) (NYSE:ABB) and Emerson Electric Co. (NYSE:EMR), Regal Beloit is the cheapest valued among the three. ABB Ltd (ADR) (NYSE:ABB) is trading at $21.60 per share, with the total market cap of $49.70 billion. The market values the company much more expensive, at 9.6 times trailing EBITDA.
ABB Ltd (ADR) (NYSE:ABB) is a Swiss company providing power transmission, distribution and power-plant automation to different industries in 100 countries. ABB has been spreading its operations in four continents with majority of orders, 37% of the total orders, coming from Europe while Asia and Americas, each generated 27% of the total orders in the first quarter of 2013.
Looking forward, the company reported that despite the unclear short-term outlook, the long-term was quite supportive. ABB expected to experience growth in Americas and Asia while Europe and Middle East & Africa stayed flat due to low utility spending in Europe and political and security risks in Middle East & Africa. The dividend yield is much higher than REGAL-BELOIT CORPORATION (NYSE:RBC), at 3.4%.
Emerson Electric Co. (NYSE:EMR) is also valued higher than REGAL-BELOIT CORPORATION (NYSE:RBC). At $55.60 per share, Emerson Electric is worth $40 billion on the market. It is valued at 8.53 times its trailing EBITDA.
In 2013, Emerson Electric Co. (NYSE:EMR) expected the sales growth to stay in the range of 1.5% to 2.5%. Latin America and Middle East & Africa would be the two fastest growth segment, with 8%-10% range and 6%-10% range, respectively. The U.S., Canada and Europe regions were expected to have sluggish growth, in the range of -2% to 2%.
For the full year 2013, Emerson Electric estimated that the net sales would be around $24.7 to $25 billion while the EPS might come in at $3.48 to $3.58 per share. It also expected to pay it shareholders $1.64 per share in dividend. At the current trading price, its dividend yield is around 3%.
Income investors might be discouraged because of REGAL-BELOIT CORPORATION (NYSE:RBC)’s low dividend yield. However, its payout ratio is much lower than the other two companies, at only 17%, while the payout ratios of ABB and Emerson Electric are 60% and 57%, respectively. If Regal Beloit pays around 60% of its earnings in dividend, its dividend yield should reach nearly 4.6%.
My Foolish take
With the consistent growth in revenue and net earnings, good cash flow generating capabilities, conservative capital structure and low valuation, Regal Beloit could be a good pick for long-term investors at its current trading price. Moreover, the company had the potential to offer shareholders quite juicy dividend yield if it increased its payout ratio to the payout level of both ABB and Emerson Electric.
The article This Electric Company Is a Good Buy originally appeared on Fool.com and is written by Anh Hoang.
Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Emerson Electric Co (NYSE:EMR). Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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