We recently compiled a list of the 10 Best Manufacturing Stocks To Buy According to Analysts. In this article, we are going to take a look at where Regal Rexnord Corporation (NYSE:RRX) stands against the other manufacturing stocks.
2024 is seeing a momentous shift in global manufacturing trends that have cemented themselves over the past three decades. After China opened its economy in 1978, its sizeable population coupled with low living standards that resulted in lower wages attracted Western firms to its shores. Fast forward to 2024 and the biggest Western companies all rely on Chinese firms for their mass production needs and the disputed region of Taiwan houses the world’s biggest contract chip manufacturer.
However, now, these trends are reversing. Prior to and leading to the coronavirus pandemic, China’s share of global manufacturing rose to 31% in 2021 from 26% in 2017, and during the same time period, the Chinese share of the world’s manufactured exports jumped to 21% from 17%. These trends came as global manufacturing dropped because of the pandemic, but their reversal started in 2023 when data from the first quarter revealed that the share of Chinese made products in US imports stood at 13.3%. This marked a sharp decline from 2017’s 21.6% and was the lowest figure since 2003. These trends were also visible in the Kearney Reshoring Index, which indicates that US imports from low cost Asian countries declined by $143 billion in 2023, with Mexico crossing mainland China as the largest exporter to America for the first time since 2013 through its 32% growth.
The US and China are decoupling, and this is leading to some interesting, obvious, and unpredictable dynamics. First of all, during the same year, China’s share of American imports dropped, and US manufacturing companies grew their construction projects that covered a wide variety of industries such as food and beverage, chemicals, and chip production. Data shows that in the 12 months ending in August 2023, construction spending for manufacturing facilities surged by a whopping 80%. Mind you, this came at a time when interest rates had soared to decade high levels as the Federal Reserve battled high interest rates. Electronics led all sub categories by marking a jump of 237%, while other non residential construction spending grew by a rather paltry 6%.
While we’ll get to the reasons behind this surge in electronics in a bit, the US is not the only country in North America that’s seeing a resurgence in manufacturing spending. Right down the Southern border, Mexico is witnessing a similar boom. Foreign Direct Investment (FDI) data outlines that capital inflows in Mexico are expected to grow 10% annually to touch $650 billion by 2027. This is fueled by nearly 500 foreign companies either setting up or increasing their presence, including big ticket US automakers that have traditionally relied on their Mexican plants for lower costs.
However, these near shoring trends aren’t driven only by American companies, as Chinese companies are also eager to move to Mexico and benefit from the country’s trade ties and proximity to America. This is because as of Q3 2022, within the 5 million square meters of land acquired by new companies, 80% belonged to Chinese companies with American firms coming in second place at 14%. While the impact of this exodus on the Chinese economy is hard to quantify, research suggests that it could lead to anywhere between 1.3 million to 1.9 million jobs being lost in China.
Additionally, while the Chinese economy is slowing down due to the effect of the post pandemic policies, global growth expectations are also expected to stay muted. We’re in a historic era of high interest rates that raise the costs of setting up new plants. According to the IMF, global economic growth will remain muted in 2024 and 2025 and continue to sit at 3.2% during both years. Growth in advanced economies is expected to slightly pick up to 1.7% in 2024 over 2023’s 1.6%, while the developing world’s growth can slow down to 4.2% this year from last year’s 4.3%.
This decoupling between China and the West is the clearest in high growth and high technology industries of electric vehicles and semiconductor fabrication. Within the US, the Biden Administration’s CHIPS and Science Act and the Inflation Reduction Act (IRA) have authorized $280 billion and $500 billion in spending and tax cuts, respectively, to spearhead semiconductor fabrication and clean energy technologies in America. The IRA in particular incentivizes EV sourcing and assembly in America. For an EV to qualify for tax credits up to $7,500, its manufacturer must assemble the final product in America and source a certain portion of its raw materials from North America or countries that have trade agreements with the U.S. Additionally, not only does the CHIPS Act prevent companies that use its funds from using the profits from facilities set up with the funds to set up plants in countries hostile to America, but it also incentivizes global and local companies to set up their factories in America.
These seismic-level shifts occur just as Europe increased tariffs on Chinese EVs to as much as 37.6%, a striking blow delivered precisely when Chinese EVs were soaring in popularity on the continent. The EV industry isn’t the only one that benefited from the IRA. On the act’s first anniversary in July 2023, more than 170,000 jobs were added across America along with 272 new clean energy projects for $278 billion in new investments. These include an expansion of the world’s largest wind turbine factory in Pueblo, Colorado, Minnesota’s largest solar power plant, and America’s first facility to make polisilicon based solar cells.
As the winds of manufacturing continue to shift, we decided to check what manufacturing stocks are on the analysts’ radar.
Our Methodology
To make our list of the best manufacturing stocks according to analysts, we ranked the top 50 holdings of iShares’ synonymous named ETF and added some stocks of our own with a sizeable manufacturing presence in America by the average analyst share price target upside and picked out the top stocks.
We also mentioned the number of hedge funds that had bought these stocks during the same filing period. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A technician inspecting a specialized industrial machinery in an engineering lab.
Regal Rexnord Corporation (NYSE:RRX)
Number of Hedge Fund Investors in Q1 2024: 31
Average Analyst Share Price Upside: 25%
Average Analyst Share Price Target: $192.75
Regal Rexnord Corporation (NYSE:RRX) is a diversified industrial equipment company that serves the needs of agriculture, construction, power generation, mining, food and beverages, and medical devices industries along with others. Its target industries, particularly agriculture and industries make it vulnerable to a revenue slowdown during an economic downturn. Additionally, Regal Rexnord Corporation (NYSE:RRX)’s products such as power generation and transmission products require vast amounts of capital to fund manufacturing, which further exposes it to a downturn by leaving it vulnerable to maintain healthy leverage ratios. This is also evident on the balance sheet, with $6.5 billion in long term debt compared to $15 billion in total assets leaving Regal Rexnord Corporation (NYSE:RRX) in a rather precarious position. Management is also aware of the need to control margins in a cost heavy business, and Regal Rexnord Corporation (NYSE:RRX) has implemented an 80/20 strategy through which aims to focus on only those products and businesses that generate the highest returns.
Diamond Hill Capital mentioned Regal Rexnord Corporation (NYSE:RRX) in its Q1 2024 investor letter. Here is what the firm said:
“Designer and manufacturer of industrial powertrain solutions, power transmission components and other specialty electronics Regal Rexnord is capitalizing on merger synergies and its commitment to focusing on its most productive areas to improve margins and drive organic growth faster than peers. While the company’s leverage is somewhat elevated, possibly exposing it to any macroeconomic weakness, recent strong free cash flow generation has helped it make progress deleveraging. We believe Regal Rexnord remains well-positioned to benefit from secular tailwinds such as the increased focus on energy efficiency, automation, re-shoring and electrification in the period ahead.”
Overall RRX ranks 3rd on our list of the best manufacturing stocks to buy according to analysts. You can visit 10 Best Manufacturing Stocks To Buy According to Analysts to see the other manufacturing stocks that are on hedge funds’ radar. While we acknowledge the potential of RRX as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than RRX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
