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Rexnord (RXN) Downgraded To 'Sell' By Deutsche Bank, PT Lifted To $21

 January 07, 2013 02:34 PM

(By Balaseshan) Deutsche Bank analyst John Inch downgraded rating of Rexnord Corp. (NYSE: RXN) to "Sell" from "Hold" while increasing price target to $21 from $19.

"Rexnord is currently trading at just over $21 per share – a roughly 6-month high – and up roughly 40% from the lows in mid-August. At more than $21 per share, RXN shares appear fully valued and share price could be pressured given macro uncertainties and elevated expectations, in our view," said Inch.

The analyst remains particularly concerned about mining end markets which represent one of the company's largest customer exposures at an estimated 18% of sales this year.

While Rexnord's mining-related sales have been trending up year-over-year, mining orders in the most recent quarter were down, the brokerage noted. Moreover, coal mining order trends sequentially deteriorated (coal represents roughly 1/3 of mining).

While Rexnord's leverage metrics have been improving over the last several quarters, the company's net debt leverage still remains high on an absolute basis at 4.2 times trailing EBITDA, Inch noted. Rexnord's high leverage restricts the company's ability to expand through M&A which could otherwise help to support an elevated valuation.

Given the above-average financial leverage, the analyst continues to believe an EV/EBITDA approach, rather than price-to-earnings (P/E), is more appropriate to establish a framework for target valuation. RXN's peers are trading at a median 12-month forward EV/EBITDA multiple of 8.2 times.

Applying a slightly higher EBITDA multiple of just over 8.5 times to the brokerage's forecast calendar 2013 EBITDA (imputes to more than 18 forward P/E multiple), it derives $21 price target for Rexnord's shares.

"Our target multiple appears reasonable given the above-average leverage of the company to a cyclical upturn – including non-residential construction markets – and the high caliber management team," said Inch.

RXN is trading down 3.92% at $20.35 on Monday.

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