Rating Update: Stock Rating B-Positive (11/8/19)-RBC Bearings Inc (ROLL).

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BUSINESS

RBC Bearings Incorporated manufactures and markets engineered precision bearings and components in North America, Europe, Asia, and Latin America. It operates in four segments: Plain Bearings, Roller Bearings, Ball Bearings, and Engineered Products. The Plain Bearings segment produces plain bearings with self-lubricating or metal-to-metal designs, including rod end bearings, spherical plain bearings, and journal bearings that are primarily used to rectify inevitable misalignments in various mechanical components, such as aircraft controls, helicopter rotors, or in heavy mining and construction equipment. The Roller Bearings segment offers heavy duty needle roller bearings with inner rings, tapered roller bearings, track rollers, and aircraft roller bearings, which are anti-friction bearings that use rollers instead of balls.
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INVESTMENT RATING

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ROLL is expected to continue to be a Value Builder reflecting capital returns that are forecasted to be above the cost of capital.

RBC Bearings has a current Value Trend Rating of B (Positive).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing very contradictory signals. RBC Bearings has a slightly negative Appreciation Score of 33 but a very high Power Rating of 92, resulting in the Positive Value Trend Rating.

RBC Bearings’ stock is selling above targeted value. The current stock price of $167.31 compares to targeted value 12 months forward of $134.
This moderately low appreciation potential results in an appreciation score of 33 (67% of the universe has greater appreciation potential.)
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RBC Bearings has a Power Rating of 92. (This very high Power Rating indicates that ROLL has a better chance of achieving attractive investment performance over the near to intermediate term than all but 8% of companies in the universe.)
Factors contributing to this very high Power Rating include: recent price action has been extremely favorable; is in a strong phase current; and earnings estimate behavior for ROLL has been slightly favorable recently.

INVESTMENT PROFILE

ROLL’s financial strength is exceptional. Financial strength rating is 91.
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Relative to the S&P 500 Composite, RBC Bearings Inc has neutral Growth/Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that ROLL is lower risk. Low expected growth is a relative weakness for ROLL. ROLL’s valuation is high: low dividend yield, high P/E ratio, and moderate price/book ratio. ROLL has unusually low market capitalization.

CURRENT SIGNALS

RBC Bearings’ current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; rising tax keep rate; and rising leverage.

RBC Bearings’ current technical position is very strong. The stock price is in a 5.8 month up move. The stock has appreciated 32.7% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

The stock is currently rated B.
On 11/8/19, RBC Bearings Inc (NASDAQ: ROLL) stock suffered a major decline of -20.0%, closing at $0.02. However, this decline was accompanied by unusually low trading volume at 59% of normal. Relative to the market the stock has been exceptionally strong over the last nine months and has risen 4.3% during the last week.

CASH FLOW

In 2019, RBC Bearings experienced a very significant reduction in cash of -$24.3 million (-45%). Sources of cash were much lower than uses. Cash generated from 2019 EBITDA totalled +$178.9 million. Non-operating uses consumed -$18.0 million (-10% of EBITDA). Cash taxes consumed -$25.8 million (-14% of EBITDA). Re-investment in the business amounted to -$53.4 million (-30% of EBITDA). On a net basis, debt investors withdrew -$134.9 million (-75% of EBITDA) while equity investors provided +$28.8 million (+16% of EBITDA).
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RBC Bearings’ Non-operating Income, %EBITDA has experienced a small downtrend over the period. This downtrend was accompanied by stability for the Rbc Bearings Inc Peer Group. In most years, RBC Bearings was in the third quartile and lower quartile. Currently, RBC Bearings is lower quartile at -10% of EBITDA (-$18.0 million).

RBC Bearings’ Cash Taxes, %EBITDA has exhibited a very small overall uptrend over the period. This improvement was accompanied by stability for the Rbc Bearings Inc Peer Group. In most years, RBC Bearings was in the third quartile and second quartile. Currently, RBC Bearings is below median at -14% of EBITDA (-$25.8 million).

RBC Bearings’ Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Rbc Bearings Inc Peer Group. In most years, RBC Bearings was in the second quartile and top quartile. Currently, RBC Bearings is slightly above median at -30% of EBITDA (-$53.4 million).

RBC Bearings’ Debt Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Rbc Bearings Inc Peer Group. In most years, RBC Bearings was in the lower quartile and third quartile. Currently, RBC Bearings is lower quartile at -75% of EBITDA (-$134.9 million).

RBC Bearings’ Equity Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Rbc Bearings Inc Peer Group. (Since 2015 Equity Investors, %EBITDA has experienced very sharp improvement.) In most years, RBC Bearings was in the top quartile and second quartile. Currently, RBC Bearings is upper quartile at +16% of EBITDA (+$28.8 million).

RBC Bearings’ Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Rbc Bearings Inc Peer Group. In most years, RBC Bearings was in the third quartile and top quartile. Currently, RBC Bearings is substantially below median at -14% of EBITDA (-$24.3 million).
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RBC Bearings’ Cash, %Revenue has experienced a downtrend over the period. This downtrend was accompanied by stability for the Rbc Bearings Inc Peer Group. In most years, RBC Bearings was in the third quartile and second quartile. Currently, RBC Bearings is below median at +4%.

PROFITABILITY

RBC Bearings’ return on equity has eroded slightly since 2010.
This slight erosion was due to strong negative trend in pretax operating return and strong positive trend in non-operating factors.
The productivity of RBC Bearings’ assets declined over the full period 2010-2019: asset turnover has suffered a strong overall downtrend although it experienced a minor recovery after the 2015 low.
Non-operating factors (income taxes and financial leverage) had a significant positive influence on return on equity.
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RBC Bearings’ return on equity is at median (10.9%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is at the upper quartile (11.0%) reflecting asset turnover that is at median (0.60X) and upper quartile pretax margin (18.4%).
Tax “keep” rate (income tax management) is at the upper quartile (82.9%) resulting in after tax return on assets that is upper quartile.
Financial leverage (leverage) is lower quartile (1.20X).

GROWTH RATES

Overall, RBC Bearings’ growth rate has slowed very considerably in recent years.
RBC Bearings’ historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been 8.5% per year. (More recently it has been 3.4%.)

Total asset growth has been 12.5% per year. (More recently it has been 0.6%.)

Annual E.P.S. growth has been 13.0% per year. (More recently it has been 20.5%.)

Equity growth has been 11.9% per year.

RBC Bearings’ consensus growth rate forecast (average of Wall Street analysts) is 5.9% — substantially below the average of the historical growth measures.
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Relative to the Rbc Bearings Inc Peer Group, RBC Bearings’ historical growth measures are erratic. Equity growth (11.9%) has been upper quartile. Total asset growth (12.5%) has been upper quartile. Revenue growth (8.5%) has been substantially above median. E.P.S. growth (13.0%) has been slightly above median.

Consensus growth forecast (5.9%) is lower quartile.
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PRICE HISTORY

Over the full time period, RBC Bearings’ stock price performance has been variable and exceptional. Between January, 2009 and November, 2019, RBC Bearings’ stock price rose +815%; relative to the market, this was a +144% gain. Significant price moves during the period: 1) January, 2016 – November, 2018: +158%; and 2) February, 2009 – December, 2013: +374%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 8.6% is below median relative to the S&P 500 Composite.
In addition to being below median relative to S&P 500 Composite, current annual total return performance through October, 2019 of 8.6% is at the lower quartile relative to RBC Bearings Inc Peer Group.

Current 5-year total return performance of 21.4% is upper quartile relative to the S&P 500 Composite.
Through October, 2019, with upper quartile current 5-year total return of 21.4% relative to S&P 500 Composite, RBC Bearings’ total return performance is upper quartile relative to RBC Bearings Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, ROLL’s overall valuation is quite high. Four of five factors are lower quartile. The highest factor is the ratio of enterprise value/assets, followed by the price/earnings ratio, then by the ratio of enterprise value/revenue, then by the ratio of enterprise value/earnings before interest and taxes. The lowest factor, price/equity ratio, is above median.
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RBC Bearings has a major value gap compared to the median valuation. For ROLL to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 5.93X to 3.75X. If ROLL’s ratio of enterprise value/revenue were to fall to 3.75X, its stock price would be lower by $-62 to $105.
For ROLL to fall to lower quartile valuation relative to the RBC Bearings Inc Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 5.93X to 2.70X. If ROLL’s ratio of enterprise value/revenue were to fall to 2.70X, its stock price would decline by $-91 from the current level of $167.

VALUE TARGETS

ROLL is expected to continue to be a Value Builder reflecting capital returns that are forecasted to be above the cost of capital.
RBC Bearings’ current Price Target of $148 represents a -12% change from the current price of $167.31.
This moderately low appreciation potential results in an appreciation score of 33 (67% of the universe has greater appreciation potential.)
Notwithstanding this moderately low Appreciation Score of 33, the high Power Rating of 92 results in an Value Trend Rating of B.
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RBC Bearings’ current Price Target is $148 (+32% from the 2019 Target of $112 but -12% from the 11/08/19 price of $167.31). This dramatic rise in the Target is the result of a +24% increase in the equity base and a +6% increase in the price/equity multiple. The forecasted increase in cost of equity has a large negative impact on the price/equity multiple and the forecasted decline in return on equity has a slight negative impact as well. More than offsetting these Drivers, the forecasted increase in growth has a very large positive impact.
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PTR’s return on equity forecast is 12.2% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2011 and 2019. The current forecast is above the 2016 low of 9%.

PTR’s growth forecast is 19.0% — above our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2011 and 2019. The current forecast is significantly above the 2011 low of 7%.

PTR’s cost of equity forecast is 8.5% — in line with recent levels. Forecasted cost of equity exhibited a modest, variable increase between 2011 and 2019. The current forecast is steady at the 2011 low of 6.6%.
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At RBC Bearings’ current price of $167.31, investors are placing a positive value of $104 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 10.0% per year, and a return on equity of 12.5% versus a cost of equity of 7.7%.
PTR’s 2021 Price Target of $148 is based on these forecasts and reflects an estimated value of existing assets of $70 and a value of future investments of $78.

About John Lafferty 52821 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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