Monday, KeyBanc Capital downgraded Regal-Beloit Corp. (RBC) shares to Hold from Buy. The brokerage maintained its 2009 EPS estimate of $2.35.Analyst Jeffrey Hammond downgraded the stock as risk-reward is more balanced.
Following recent strength in its share price, the analyst downgraded the stock to Hold. The analyst continues to favor companies with North American centric early-cycle end markets (including RBC) as he believes those end markets will be among the first to recover following macro stabilization.
Furthermore, the analyst believes management has executed well on Lean Six Sigma initiatives and will continue to extract cost from the business, which should drive meaningful operating leverage as volumes recover.
That said, the analyst believes shares have become overextended in light of what will likely be a challenging first half of 2009, with only nominal sequential improvement in light of customer and internal inventory destocking.
The analyst would become more constructive on RBC after near-term expectations are reset. However, given recent share performance (without additional visibility), the analyst believes a Hold rating is more appropriate. The analyst maintained his 2009 estimate of $2.35, following recent field checks.
The analyst believes RBC will generate solid earnings momentum in second half of 2009 as the company works down inventory levels and fully realizes the benefits from restructuring and lower commodity costs.
While the analyst believes a stabilization in earnings will lag the group by one quarter (second quarter of 2009), in the meantime, RBC generates free cash flow in excess of net income (2009 FCF is approximately 180% of net income), maintains a reasonably levered balance sheet and has no significant upcoming debt maturities ($165 million due 2013).
Currently, RBC is down $1.17 or 3.21% and trading at $35.29.
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