Unlike many ideas posted to VIC, there is no hidden asset here, value creation through an acquisition (i.e. Rayonier)
or some other unique factor. I think the market is valuing this slow-growing cyclical at too much of a discount
relative to other industrials and less volatile non-cyclicals. I am unable to find many businesses with low-single-digit
growth and a margin improvement story trading at ~11x FCF. Due to an amortization charge that overstates
economic D&A, FCF averaged 138% of net income over the past five years. Therefore, headline PE-ratios are not
reflective of the true trading multiples.
Regal Beloit produces high efficiency motors and power transmission systems. The company is poised to benefit
from trends in energy efficiency and end-market recovery. After several years of negative growth in oil & gas,
mining and agricultural and weak general industrial demand, I believe Regal is poised to show organic growth at
least in line with its 2%-4% guidance and margin improvement from volume and cost savings as its “simplification
strategy” is completed. This growth plus a reasonable valuation sets the stock up for outperformance.
Regal manufactures fractional HP motors, blowers, integral HP motors, generators, drives, gearing, bearings,
couplings and other products. The company is split into three segments: Commercial and Industrial Systems
(“C&I”), Climate Solutions (“CS”) and Power Transmission Solutions (“PTS”).
Commercial and Industrial (47% of sales / 36% of EBITDA / 30%-35% incremental margins) produces fractional,
integral and large HP motors and (variable speed) controls, blowers, generators, starters, relays, variable frequency
drives and controls, alternators, switching gear and integrated solutions for the HVAC, pool and spa, power (standby
and critical), oil & gas, mining, metals, chemical and other industries. Products include pumps, fans, compressors,
conveyors, augers, blowers and irrigation equipment. US & Canada comprise the majority of sales followed by
Asia-Pacific and Europe.
Climate Solutions (30% of sales / 35% of EBITDA / 25%-30% incremental margins) produces small motors,
(variable speed) controls and air moving solutions for residential and light commercial HVAC, water heaters,
commercial refrigeration and general industries. These air moving solutions move air into and away from furnaces,
heat pumps, air conditioners, ventilators and other equipment. This business has a large installed base and significant
replacement demand. US & Canada represent the majority of sales followed by Mexico, Europe and ROW.
Power Transmission Solutions (23% of sales / 29% of EBITDA / 35%-40% incremental margins) consists largely of
an acquisition from Emerson for $1.4 billion in 2015. This segment manufactures and services highly-engineered
belt and chain drives, various bearings, gearing, couplings, plastic belts, conveying chains, pump drives and other
mechanical products. Similar to CS, a large installed base creates significant replacement demand (~45% of sales).
Industries served include HVAC, food & beverage, materials handling, oil & gas, metals, special machinery,
aerospace and general industrial. US & Canada comprise the majority of sales followed by EMEA, Mexico and
Overall, production is split roughly equally between the US & Canada, Mexico and Asia, with a small sliver in
Europe. OEM comprises ~64% of revenue with the balance in the distribution channel. CS is more OEM (75%-
80%) whereas PTS is more distribution (60%+). The latter is typically repair and replacement demand in the MRO
channel which shows higher margins. Cost of goods sold is tied to copper, steel and aluminum prices.
C&I performance is correlated to industrial production trends, including oil & gas but less tied to the auto and
aerospace markets. Roughly two-thirds oil & gas is related to upstream and one-third to downstream. Other drivers
include transport refrigeration, commercial HVAC, residential pool and data centers.
The CS business is tied more to residential and light commercial end-markets. New housing growth, pent-up
demand and a continued transition to higher SEER provides some tailwinds.
PTS is exposed to general industrial, materials handing, oil & gas, renewables and metals and various other verticals.