Regal Rexnord (RRX)

Industrials products and automation company Regal Rexnord (NYSE:RRX). announced better-than-expected revenue in Q1 CY2025, but sales fell by 8.4% year on year to $1.42 billion. Its non-GAAP profit of $2.15 per share was 17.7% above analysts’ consensus estimates.

Company Overview

Headquartered in Milwaukee, Regal Rexnord (NYSE:RRX) provides power transmission and industrial automation products.

Engineered components and systems companies possess technical know-how in sometimes narrow areas such as metal forming or intelligent robotics. Lately, automation and connected equipment collecting analyzable data have been trending, creating new demand. On the other hand, like the broader industrials sector, engineered components and systems companies are at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.

Competitors of Regal Rexnord include Siemens (ETR:SIE), ABB (NYSE:ABB), and Schneider Electric (EPA:SU).

Reviewing a company’s long-term sales performance reveals insights into its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Luckily, Regal Rexnord’s sales grew at an exceptional 13.6% compounded annual growth rate over the last five years. Its growth beat the average industrials company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Regal Rexnord’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 7.1% over the last two years was well below its five-year trend.

We can better understand the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations that don’t accurately reflect its fundamentals. Over the last two years, Regal Rexnord’s organic revenue averaged 6% year-on-year declines. Because this number is lower than its normal revenue growth, we can see that some mixture of acquisitions and foreign exchange rates boosted its headline results.

This quarter, Regal Rexnord’s revenue fell by 8.4% year on year to $1.42 billion but beat Wall Street’s estimates by 3%.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and indicates its products and services will see some demand headwinds.

Regal Rexnord’s gross margin is good compared to other industrials businesses and signals it sells differentiated products, not commodities. As you can see below, it averaged an impressive 33.4% gross margin over the last five years. Said differently, Regal Rexnord paid its suppliers $66.64 for every $100 in revenue.

Regal Rexnord’s gross profit margin came in at 37.2% this quarter, in line with the same quarter last year. Zooming out, Regal Rexnord’s full-year margin has been trending up over the past 12 months, increasing by 2.4 percentage points. If this move continues, it could suggest better unit economics due to some combination of stable to improving pricing power and input costs (such as raw materials).

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Regal Rexnord has done a decent job managing its cost base over the last five years. The company has produced an average operating margin of 9.7%, higher than the broader industrials sector.

Analyzing the trend in its profitability, Regal Rexnord’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Regal Rexnord generated an operating profit margin of 11.3%, up 2.6 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Regal Rexnord’s EPS grew at a solid 11.4% compounded annual growth rate over the last five years. However, this performance was lower than its 13.6% annualized revenue growth, telling us the company became less profitable on a per-share basis as it expanded.

We can take a deeper look into Regal Rexnord’s earnings to better understand the drivers of its performance. A five-year view shows Regal Rexnord has diluted its shareholders, growing its share count by 63%. This has led to lower per share earnings. Taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Regal Rexnord, its two-year annual EPS declines of 5% mark a reversal from its (seemingly) healthy five-year trend. We hope Regal Rexnord can return to earnings growth in the future.

In Q1, Regal Rexnord reported EPS at $2.15, up from $2 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Regal Rexnord’s full-year EPS of $9.27 to grow 9.2%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Regal Rexnord has shown impressive cash profitability, enabling it to ride out cyclical downturns more easily while maintaining its investments in new and existing offerings. The company’s free cash flow margin averaged 8.6% over the last five years, better than the broader industrials sector.

Taking a step back, we can see that Regal Rexnord’s margin dropped by 2.4 percentage points during that time. If its declines continue, it could signal increasing investment needs and capital intensity.

Regal Rexnord’s free cash flow clocked in at $85.5 million in Q1, equivalent to a 6% margin. This result was good as its margin was 1.9 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, causing temporary swings. Long-term trends are more important.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Regal Rexnord historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.9%, lower than the typical cost of capital (how much it costs to raise money) for industrials companies.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Regal Rexnord’s ROIC averaged 3.2 percentage point decreases each year. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Regal Rexnord reported $305.3 million of cash and $5.33 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.30 billion of EBITDA over the last 12 months, we view Regal Rexnord’s 3.9× net-debt-to-EBITDA ratio as safe. We also see its $364.6 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Regal Rexnord blew past analysts’ organic revenue expectations this quarter. We were also glad its EPS and full-year EPS guidance trumped Wall Street’s estimates. Zooming out, we think this quarter featured some important positives. The stock traded up 8% to $119 immediately after reporting.

Updated: May 16, 2025 at 11:12 PM EDT

When considering an investment in Regal Rexnord, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Regal Rexnord isn’t a terrible business, but it doesn’t pass our bar. Although its revenue growth was exceptional over the last five years, it’s expected to deteriorate over the next 12 months and its relatively low ROIC suggests management has struggled to find compelling investment opportunities. And while the company’s solid EPS growth over the last five years shows its profits are trickling down to shareholders, the downside is its organic revenue declined.

Regal Rexnord’s P/E ratio based on the next 12 months is 14x. While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $162.82 on the company (compared to the current share price of $141).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist. We typically have quarterly earnings results analyzed within seconds of the data being released, giving investors the chance to react before the market has fully absorbed the information. This is especially true for companies reporting pre-market.