RRX › analyze
RRX · Analyze
Price $150.71 · Mkt cap $10.03B · EV $14.19B · Net debt $4.17B (3.11x)
Verdict: WATCH — conviction 5.5. The highest-quality setup of the three names screened today and still not a buy at $150.71. A narrative inflated and deflated in ten weeks; the underlying business is a 4%-organic-growth, 3.1x-levered roll-up whose growth engine is margin-dilutive. Cheap only on the most generous of five available EPS denominators.
0. Framework placement
| Company quality | Market price | Verdict |
|---|---|---|
| Average — scale/distribution, no franchise | Fair, not cheap | Wait / watch — and let the new CEO guide once |
1. 🚩 Data corrections — three numbers do not survive the quarterlies
| Field | Vendor / headline | Corrected | Why |
|---|---|---|---|
| FY2025 FCF $893.1M | reads as 8.9% FCF yield | normalized ≈ $574M; TTM = $466.3M → 4.6% yield | Q2-2025 alone contributed $493.0M, of which +$319.2M was a single receivables swing. Not repeatable. |
PE(fwd) 11.56 |
reads as "cheap industrial" | FY2027 adjusted — and FY2026 GAAP is 26.6x | The cheapest of five denominators (see §4) |
| Analyst mean target $248.20 | +65% upside | stale, unusable | No target cut below $220 after a 39% drawdown; last action a KeyBanc trim to $240 on 6 Aug, before most of the decline |
Quarterly FCF, which is what the annual table hides:
| Q2-25 | Q3-25 | Q4-25 | Q1-26 | Q2-26 | TTM |
|---|---|---|---|---|---|
| $493.0M | $174.0M | $140.6M | −$2.5M | $154.2M | $466.3M |
H1-2026 FCF is $151.7M against a full-year guide of $600M. The back half must produce ~$448M. That is the single most testable claim in the file, and it is due 28 October.
Also corrected: this is not a year-long decline. A year ago RRX traded ~$143 — it is roughly +5% YoY. The 39% drawdown is a two-and-a-half-month event.
2. Fundamentals
The roll-up arithmetic
| FY22 | FY23 | FY24 | FY25 | TTM (thru Jun-26) | |
|---|---|---|---|---|---|
| Revenue | $5.22B | $6.25B | $6.03B | $5.93B | $6.06B |
| Operating income | $691.3M | $522.1M | $638.5M | $685.3M | — |
| Net income | $488.9M | −$57.4M | $196.2M | $279.5M | $324.1M |
| GAAP diluted EPS | $7.29 | −$0.87 | $2.94 | $4.20 | $4.85 |
| Interest expense | $87.2M | $431.0M | $399.7M | $349.2M | $331.6M |
| FCF | $352.4M | $596.2M | $499.9M | $893.1M* | $466.3M |
* contains the $319M receivables one-off
Three-year revenue CAGR +4.4%; three-year net income CAGR −17.0%. That is the outcome of roughly $8.5B of acquisitions (Rexnord PMC ~$3.7B in 2021, Altra $4.87B in 2023). Revenue was bought; earnings were not. ROE 5%, ROA 3%, net margin 5%.
Recent quarters
| Q1 2026 (rep. ~5 May) | Q2 2026 (rep. 5 Aug) | |
|---|---|---|
| Revenue | $1,479.1M, +4.3% | $1,558.4M, +4.2% — missed ~$1.58B |
| Organic | +1.6% (FX +2.7% did the work) | +3.3% |
| GAAP EPS | $0.96 | $1.74 |
| Adjusted EPS | $2.17 (+0.9%) | $2.99 (+20.6%) |
| Adj. EBITDA | $304.4M (down from $309.5M) | $366.6M (+11.2%) |
| FCF | −$2.5M (vs +$85.5M) | $154.1M |
| Net debt / leverage | $4,305M, 3.31x | $4,170M, 3.11x |
| Stock reaction | −8.4% | −14% to −16% |
🚩 The Q2 "beat" is largely a tariff refund. $32M of the adjusted EBITDA is an IEEPA refund — ~$0.39 of EPS and ~200bps of margin. Strip it and the beat mostly disappears. FY26 adjusted EPS guidance of $10.35–$10.85 includes $0.57 of such refunds; core EPS was effectively cut while the midpoint held. FCF guidance was cut $650M → $600M, blamed on working capital for AMC growth.
H2 adjusted EBITDA margin is guided to 21.5% ex-tariff refunds — below H1 — on price/cost lag, productivity slippage and adverse mix.
Balance sheet and deleveraging
| 2023 | 2024 | 2025 | Q2-26 | |
|---|---|---|---|---|
| Total debt | $6.55B | $5.61B | $4.94B | $4.61B |
| Net debt / adj EBITDA | ~4.5x+ | — | ~3.4x | 3.11x (3.06x w/ synergies) |
Target: below 3.0x in H2 2026. Close but not banked — it depends on the H2 EBITDA guide holding and the reduced $600M FCF landing.
Maturities: the 6.050% $1,100M notes due 2026 were refinanced in Q1-2026 via an $850M term facility plus revolver. Remaining senior notes $3,600M: $1,250M 6.050% due 2028 · $1,100M 6.300% due 2030 · $1,250M 6.400% due 2033. The near wall is cleared; 2028 is next.
⚠️ Do not extrapolate the interest-expense decline. The 2026 refi swapped fixed 6.05% notes for floating-rate bank debt, so the clean march $431M → $400M → $349M now carries rate risk. The notes also carry a 2.00% step-up on certain ratings downgrades — a real tail risk at 3.1x leverage with $6.6B of goodwill against $6.8B of equity.
Capital allocation
$0 buybacks in 2023, $50M in 2024, $0 in 2025. Dividends flat at ~$93M/yr. Every discretionary dollar has gone to debt — which is the right priority, and also why there is no shareholder return to underwrite while waiting.
3. Moat — scale and distribution, not a franchise
What is real. Couplings, bearings, gearing and conveyance (Rexnord, Altra, Marathon, Kop-Flex, Boston Gear, Falk) get specified into OEM platforms and plant layouts. Replacement is like-for-like because requalification and downtime are both expensive. This is genuine, and it is why IPS holds a 27.1% EBITDA margin.
What is not. Motors and power transmission are competitive and commoditizing at the low end — Chinese and regional motor makers, concentrated in PES, which is exactly where the volume decline is worst. No segment holds a dominant entrenched position. The moat evidence that matters is quantitative: ROE 5%, ROA 3%, three-year net income CAGR −17%, and $6.6B of goodwill against $6.8B of equity — book value is very nearly all acquisition premium.
⚠️ Aftermarket percentage is not disclosed. A ~28% figure circulates but traces to a secondary aggregator, not a filing. Do not use it as a fact.
Segments — the mix problem is the whole story
| Q2-26 sales | Organic | Adj EBITDA margin | End markets | |
|---|---|---|---|---|
| AMC | $477.7M (31%) | +15.6% | 21.1% | Data-center switchgear/E-Pod, discrete automation, aero & defence, medical, robotics |
| IPS | $669.4M (43%) | +2.0% | 27.1% | Process, metals/mining, energy, general industrial; project backlog +20% |
| PES | $411.3M (26%) | −6.6% | 20.5% | Residential/commercial HVAC, pool |
IPS is the margin engine but barely grows. AMC is the growth engine at a 6-point-lower margin, and its fastest-growing sub-segment (data-center switchgear) sits below AMC's own average. PES has printed −10.3% and −6.6% organic back-to-back on soft housing, weak consumer confidence and channel destocking.
So the more RRX "wins" on the AI narrative, the worse consolidated margin gets — which is exactly what the H2 guide to 21.5% says out loud. This is the inverse of how AI-exposure stories are normally underwritten, and it is the most under-appreciated fact about the name.
Data-center exposure — sized, and much smaller than the narrative
Management's own Q2-call numbers: ~$180M of switchgear sales in 2026, growing to $240–250M in 2027 · E-Pod $15M in Q4 2026, meaningful shipments early 2027 · the ~$735M E-Pod order book (announced 4 Feb 2026) is multi-year, shipping largely 2027–2028 · path to ~$1B over two years · contribution to 2026 growth 1–1.5 points.
Credible in part. The orders are disclosed and AMC daily orders +17.1% corroborates. But $180M is 2.9% of a $6.2B revenue base — a 2027–28 story priced in 2026; nearly half of H1's
25% AMC order growth is long-cycle; the margin is dilutive; and RRX is an entrant, not an incumbent, against Schneider, Eaton, Vertiv and ABB. The $1B is a management aspiration, not backlog.
Evergreen assessment: yes as a business, no as a compounder. Industrial motion will exist in twenty years and RRX will supply it. Whether that produces per-share value depends entirely on whether the deleveraging converts into earnings rather than into the next acquisition.
4. Valuation
The five denominators — this is the crux
| Basis | EPS | P/E at $150.71 |
|---|---|---|
| FY2025 GAAP diluted (actual) | $4.20 | 35.9x |
| TTM GAAP | $4.86 | 31.0x |
| FY2026 GAAP (guide mid) | $5.67 | 26.6x |
| FY2026 adjusted (guide mid) | $10.60 | 14.2x |
| FY2026 adjusted, ex-$0.57 tariff refund | ~$10.03 | 15.0x |
| FY2027 adjusted (consensus) | $13.04 | 11.6x ← the screen value |
The GAAP-to-adjusted gap is ~$4.90/share, ~46% of adjusted EPS — overwhelmingly amortization of Rexnord/Altra purchase intangibles ($346M/yr), plus restructuring and integration costs. Amortization is non-cash and reasonably added back; restructuring, four years running, is not.
⚠️ The 11.6x embeds FY2027 consensus revenue of $7.09B, +14.3% — against a company guiding +4.5% this year with one segment shrinking. No company statement supports that step-up. Treat FY2027 consensus as aggressive and 11.6x as the most flattering framing available.
Cross-checks
- EV/EBITDA 11.5x (TTM EBITDA $1,231.8M). Reasonable, not cheap, for a 4% grower.
- Unlevered FCF: normalized FCF ~$575M + after-tax interest ~$265M = ~$840M against $14.19B EV = ~16.9x. A normal industrial multiple — this is the honest anchor.
- Graham IV: $106.56 vs $150.71. But RRX carries $6.61B of goodwill against $6.84B of equity, so tangible book is roughly $3/share. Graham on a post-mega-acquisition industrial is nearly meaningless — flag and discard, do not present it as a 29% overvaluation.
- Bogle: 0.93% yield + ~8–10% adjusted earnings growth + 3–5%/yr from re-rating toward a historical ~15–16x ≈ 12–16%/yr if the FY27 growth arrives. That conditional is the entire investment case.
Fair value range
$140–180, on 14–18x FY2026 adjusted EPS ex-tariff-refund ($10.03). The unlevered-FCF check corroborates the middle of that band. At $150.71 the stock is in the lower-middle of fair value — genuinely reset, but not a discount.
5. Sentiment & intelligence
Why it fell — a narrative deflated, in order of weight
- A story inflated and popped. Kerrisdale Capital published a long thesis on 30 June 2026 framing RRX as a misunderstood "Physical AI" infrastructure play worth double. The 52-week high of $247.80 was set the next day. Layered on the 4 Feb Q4-2025 print announcing ~$735M of E-Pod orders and +53.8% daily orders, that took the stock $160 → $247 in five months. Both legs were narrative, not delivered earnings.
- Q2 revenue miss plus a margin and FCF walk-down (5 Aug) — the largest single-day move, −14% to −16%. The FCF cut to $600M is the sharpest signal: the second cash disappointment in two quarters.
- PES collapse — residential HVAC and pool, back-to-back −10.3% and −6.6% organic.
- CEO change. Louis Pinkham (2019–2026) exited 30 June 2026; Aamir Paul (ex-Schneider Electric President North America) started 1 July — the same week as the peak. A new CEO with no guidance track record removes the benefit of the doubt.
⚠️ Unexplained. The leg from ~$162 (11 Sep) to ~$148 (18 Sep), −8.8% on elevated volume, has no identifiable company-specific catalyst — no press release, no sourced analyst action. (The "JPM/Barclays/Goldman mid-September" items in search results are September 2025; MarketBeat mislabels them.) Most likely a sector/AI-capex de-rate or a fund unwind. Flagged as open.
🚩 Insiders — net sellers, unambiguous
| Date | Insider | Action |
|---|---|---|
| 2026-05-11 | Louis Pinkham, CEO | sold 22,509 at $209.88–$216.24 |
| 2026-05-22 | Robert Rehard, CFO | sold 6,499 at $200.00 |
| 2026-08-10 | Alexander Scarpelli, CAO | sold 170 at $176.24 |
>$12.3M net insider selling over a trailing 90-day window. No insider has bought in the open
market during the drawdown. The only "buys" in the tape are 14 July 2026 stock-award grants at
$211.20 — grants, not purchases (pitfall-yahoo-insider-purchases-counts-rsu-grants). Insider
ownership is 0.50%.
Institutional and short interest
Q2-2026 13Fs are mixed — BlackRock +3.9%, Wellington +75.8%, Victory +7.4% against FMR −3.6%,
Dimensional −9.5%, Viking Global −33.1%. All are as of 30 June 2026 — before the peak and
the entire drawdown — so they say nothing about the current setup. Kerrisdale added (~31 Aug).
Short interest 5.4% of float and rising — elevated for an industrial. (Yahoo's
heldPercentInstitutions of 111% is a data artifact; ignore.)
Dividend — a freeze, not a grower
$0.35/quarter, $1.40/yr, ~0.93% yield, ~29% GAAP payout (~13% of adjusted).
Frozen at $0.35 since March 2022 — four and a half years, zero growth. Dividends cost ~$93M/yr, flat 2022–2025. This is not an income name and does not belong in a yield sleeve. The freeze is the deleveraging story in one number; a dividend increase would be the credible signal that management believes the balance sheet is fixed — and is the single cleanest tell to watch.
6. Tensions surfaced
- Valuation vs Fundamentals on "cheap." Valuation sees 11.6x. Fundamentals sees a −17% three-year net income CAGR and 4.4% revenue growth off $8.5B of deals. Resolution: Fundamentals wins. 11.6x requires FY27 consensus revenue of +14.3% that management has never endorsed. On the company's own FY26 numbers ex-refund it is 15.0x — fair for what this is.
- Moat vs the AI story. Moat rates AMC's data-center entry as the weakest competitive position in the portfolio; Sentiment notes it is what the market paid for. Resolution: the dilutive margin settles it. Growth that lowers consolidated margin is not worth a premium multiple, and management's own H2 guide concedes the point.
- Deleveraging progress vs cash conversion. Leverage genuinely fell 3.31x → 3.11x. But FCF guidance was cut and H1 delivered only $151.7M of a $600M year. Resolution: these are the same question, and 28 October answers it. Deleveraging below 3.0x is not independent of the FCF guide holding.
7. Verdict — WATCH, conviction 5.5
This is the most interesting of the three names screened today because the price has actually moved — a 39% reset is a real change in the opportunity, not a narrative. The deleveraging is working, IPS is a genuinely good business at 27% margins, AMC orders are up >25% in H1, and the 2028 maturity wall is the next problem rather than this year's.
Against that: the growth arriving is margin-dilutive, cash conversion has missed twice running, the CEO is five weeks into the job with no guidance track record, insiders sold into the top and none bought the fall, the dividend has been frozen for four and a half years, and the September leg down has no explanation anyone could source. Buying a knife that has fallen seven consecutive weeks for an unknown reason, six weeks before the print that tests the FCF guide, is not a decision the framework supports.
Conviction 5.5 is the highest of today's three, and it is still a WATCH.
- Fair value $140–180 · price in the lower-middle
- Entry $120–135 — ~12–13.5x FY26 adjusted ex-refund, a real margin of safety on a levered 4%-growth industrial
- Trim 17x forward (multiple, not a dollar — and note
pitfall-multiple-trim-inverts-on-peak-cycle-cyclicals: RRX is at a trough of earnings power, not a peak, so the multiple should be re-set upward as adjusted EPS normalises)
What would change the verdict
| Direction | Evidence |
|---|---|
| → ACCUMULATE | Q3 delivers toward the $600M FCF guide (needs ~$448M in H2) and leverage prints below 3.0x; or price into $120–135 with the AMC backlog intact; or a dividend increase — the clean signal the balance sheet is fixed |
| → AVOID | A third consecutive cash disappointment; goodwill impairment; PES deterioration spreading to IPS; a ratings downgrade triggering the 2.00% coupon step-up |
Key risks
- Goodwill $6.6B vs equity $6.8B at 3.1x leverage with a shrinking segment. FY2023 already produced a GAAP loss. An impairment test is live.
- FY2027 consensus (+14.3% revenue) is unsupported by company guidance — and the whole "cheap" case rests on it.
- Floating-rate refinancing removed the clean interest-expense downtrend and added rate exposure, plus a 2.00% ratings step-up.
- The H2 FCF load — ~$448M needed against $151.7M in H1.
- New CEO, unproven guidance. Aamir Paul has said nothing publicly on portfolio pruning.
- The unexplained September decline. Something may be known that is not yet public.
Next binary event
2026-10-28 — Q3 2026 (Yahoo calendar; consistent with the Oct 29/30 pattern in prior years — treat as estimated until confirmed). Consensus EPS $2.68 on revenue $1.563B. Ex-dividend 29 Sept, pay 13 Oct.
Data gaps
- The −8.8% move of 11–18 Sep is unexplained — no press release, no sourced analyst action.
- Aftermarket revenue % is not disclosed; the ~28% figure is a secondary-source estimate and was excluded from the moat assessment.
- Forward interest expense is not guided, and the 2023→2025 decline must not be extrapolated after the floating-rate refi.
- The $248.20 mean target is stale — no target below $220 after a 39% drawdown.
- Divestiture premise corrected: the Industrial Motors & Generators sale to WEG S.A. closed 30 April 2024 ($400M, ~$355M net). No new divestiture is announced; whether Aamir Paul restarts portfolio pruning is open.
Sources
Q1 2026 and Q2 2026 earnings releases (PR Newswire) · Q2 2026 earnings call transcript ·
Kerrisdale Capital long thesis (2026-06-30) · SEC Form 4 filings (direction read individually) ·
Q2 2026 13F filings · Yahoo Finance MCP (statements, prices, recommendations) · .mcp/fin.py