Rexnord Has Attractive Long-Term Drivers And Credibility On Margin Improvement

I've liked Rexnord (RXN) as an under-the-radar play on automation and institutional/industrial water for a little while, and while I thought the valuation on the shares was equivocal back in January, the stock has continued to outperform the larger industrial sector - even though "outperform" in this case means "declined less than the others". At this point, I still see attractive automation-oriented opportunities in its process and motion control business, and I believe its water business may hold up better than non-residential construction in general. I likewise still see longer-term margin/cash flow improvement opportunities as the company moves toward mid-teens FCF margins.

With ongoing outperformance, it is perhaps not so surprising that the valuation isn't outstanding. I believe Rexnord is priced for high single-digit returns at this point. That's okay, but I typically favor higher hurdle rates and I consider this more of a hold or a buy-the-dip idea than a "buy now" idea.

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Rexnord Has Attractive Long-Term Drivers And Credibility On Margin Improvement