Are Investors Undervaluing Regal Rexnord Corporation (NYSE:RRX) By 38%?

In This Article:

Key Insights

  • Regal Rexnord's estimated fair value is US$271 based on 2 Stage Free Cash Flow to Equity

  • Current share price of US$169 suggests Regal Rexnord is potentially 38% undervalued

  • Analyst price target for RRX is US$209 which is 23% below our fair value estimate

How far off is Regal Rexnord Corporation (NYSE:RRX) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Don't get put off by the jargon, the math behind it is actually quite straightforward.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

Check out our latest analysis for Regal Rexnord

Crunching The Numbers

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Levered FCF ($, Millions)

US$778.2m

US$952.5m

US$1.03b

US$1.09b

US$1.15b

US$1.20b

US$1.24b

US$1.28b

US$1.32b

US$1.36b

Growth Rate Estimate Source

Analyst x6

Analyst x2

Analyst x1

Est @ 5.95%

Est @ 4.95%

Est @ 4.25%

Est @ 3.76%

Est @ 3.42%

Est @ 3.18%

Est @ 3.01%

Present Value ($, Millions) Discounted @ 8.4%

US$718

US$810

US$809

US$790

US$765

US$735

US$704

US$671

US$638

US$606

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$7.2b