Guru Robert Olstein (Trades, Portfolio) recently added to Regal Beloit Corp. (RBC, Financial) at an average price around $61. With the price currently around $58, should we consider following Ostein and take advantage of an opportunity, or should we pass?
Since we like to buy quality merchandise at a discount, it makes sense to consider three key questions:
1. Is RBC a quality company? If so, is it reasonable to assume a degree of predictability going forward?
2. Is management implementing strategies for future success?
3. Is the current market price attractive?
History of Fundamental Performance: Regal Beloit Corp.
As a self-described fundamental value investor, it seems reasonable to review past performance of fundamental metrics to see how the company has performed over multiple market cycles. The idea, then, is that this consistency adds a degree of predictability going forward. This review of RBC includes historical per-share growth in earnings, revenue and book value.
Earnings Per Share Growth
To visually review data on historical per-share growth trends, I like to use my F.A.S.T. Graphs subscription. And to get a long-term view, I have chosen to review the data over a 20-year period. RBC has grown earnings reasonably predictably over a long-term period.
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
RBC Revenue Share Growth
Again, the data demonstrates past revenue growth for RBC.
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
Book Value per Share
Last, it is helpful to review book value per share, as this metric is relatively harder to manipulate and demonstrates fundamental value growth over time. Here again RBC has done a solid job of growing this fundamental metric.
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
So, the data suggests that RBC has done a fine job in growing fundamental metrics. But one could argue the past is the past. What about the future?
RBC Management Initiatives Going Forward
Regal Beloit Corp. manufactures mechanical and electrical products including, among other products, gear drives for material-handling systems, transmissions, and electric motors and generators for use in several industries. And the company has been susceptible to the headwinds of the oil and gas industry as well as slowing demand in China. Currency translation challenges have not helped, either.
So what is management doing to battle these headwinds? First, recent acquisitions should bolster revenue. Next, management has been assertive to close inefficient operations and consolidate to drive cost savings where possible. All together these efforts should position the company well for the future.
Price to Valuation: Are Shares Attractive at Current Levels?
So we understand guru Olstein (Trades, Portfolio) added RBC at recent levels. Should we consider following him and take a long position? The answer to that question lies in the price to value relationship.
When valuing a company, I follow the school of thought to pay close attention to that company’s own historical valuation as measured by its own P/E ratio, and then take action when the price is reasonable relative to earnings. Once again, F.A.S.T. Graphs is helpful to get a visual of the relationship between price and value. In the chart below, the orange line represents earnings history and what could be considered "fair valuation" at a price/earnings multiple of 15X. The blue line represents an historic normalized average P/E. Finally, the black line is the market price.
Normal P/E Over the Past 20 Years
Looking carefully at the graphic below, we can observe that the 20-year historical normal P/E is 15.5x earnings. Today RBC is priced at 11.1x earnings. This is easily seen by looking at the black market price line compared to the blue P/E line. In other words, the black price line is below the normal P/E and reasonable valuation lines. This demonstrates that given its own historical long-term valuation, at current levels RBC is cheap relative to its earnings.
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
Normal P/E Over the Past 10 Years
So we reviewed the valuation over a 20-year period, another way to review the data to gain perspective over a shorter recent period. Let’s look at the normal P/E over the past 10 years. From the graphic below, we can observe that the 10-year historical normal P/E is 14.5x earnings. Again, today RBC is priced at 11.1x earnings. And again we can see this by looking at the black price market price line compared to the blue P/E line.
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
This review suggests that RBC is attractive at current levels both relative to its own 20-year history and 10-year history. Assuming a return to normalized levels, share prices likely have upside.
Summary
Olstein (Trades, Portfolio) recently added to Regal Beloit Corp. at an average price around $61. The company has sold off recently due to headwinds from the oil and gas industry, slowing demand in China and currency translation issues. Management is assertively working to grow revenues via acquisition, reducing costs and increasing efficiencies. So yes, at current levels shares are reasonably valued relative to RBC’s own history and a long position may be appropriate for patient investors willing to hold over reasonable timeframes. A dividend payment along the way helps a bit, too.
