RBC Bearings: Margin Mastery and Aerospace Tailwinds Fuel Buy Opportunity

The aerospace and defense sector has long been a bastion of resilience, and RBC Bearings (NASDAQ: RBC) has positioned itself as a leader in this high-margin, growth-driven space. Despite a modest revenue miss in Q4 2024, the company’s adjusted earnings surged past estimates, underscoring its ability to navigate mixed macro conditions while capitalizing on secular tailwinds. With margin expansion, debt deleveraging, and a strategic conversion of preferred stock creating significant upside, RBC Bearings presents a compelling buy opportunity for investors seeking industrial equity with structural growth.

Margin Expansion: The Engine of Profitability

RBC Bearings’ Q4 adjusted diluted EPS of $2.83 outpaced analyst estimates of $2.68–$2.71, driven by relentless focus on operational efficiency. Gross margin expanded to 44.2%, a 100-basis-point improvement year-over-year, fueled by synergies from its 2023 acquisition of Dodge Ball Bearings and a strategic shift toward higher-margin aerospace products. This margin strength is critical: aerospace/defense sales now account for 60% of total revenue, with segment growth of 16.8% in Q4 and 20.7% for the full year.

The company’s incremental margin profile is a key differentiator. Every dollar of incremental revenue in aerospace generates disproportionate profit, as evidenced by the 14.6% year-over-year EPS growth despite just 4.9% top-line expansion in Q4. Management’s emphasis on cost discipline—such as reducing SG&A expenses as a percentage of sales—has further insulated profitability.

Debt Reduction and the Preferred Stock Catalyst

RBC Bearings’ financial engineering is equally compelling. The conversion of its Series A convertible preferred stock on October 15, 2024, eliminated a $5.7 million quarterly dividend burden, saving $23 million annually. This move, completed at the end of fiscal 2024, will have a material impact on 2025 earnings. Had the conversion occurred in Q4 2024, adjusted EPS would have risen to $2.49 (vs. reported $2.47), with net leverage expected to fall “nicely below 2.0x” by fiscal 2025.

With $940.7 million in backlog (up 14% year-over-year), RBC has the visibility to accelerate debt paydown. The company reduced net debt by $275 million in 2024, and free cash flow of $241.5 million in fiscal 2024 (115% of net income) provides ample liquidity to fuel this deleveraging.

Aerospace/Defense Tailwinds: A Decade-Long Growth Driver

The company’s bet on aerospace/defense is paying off. Defense spending in the U.S. and Europe is projected to grow ~3–5% annually through 2030, while commercial aerospace demand—driven by fleet modernization and air travel recovery—is accelerating. RBC’s backlog, which now includes orders beyond the 12-month window, reflects this demand: aerospace/defense bookings grew 20.7% in 2024, with programs like the F-35 fighter jet and Boeing’s 777X dominating its pipeline.

CEO Michael Hartnett’s strategy to prioritize high-margin aerospace products has already shifted the company’s revenue mix. Industrial sales, which grew just 0.2% in 2024, now represent only 40% of revenue—a deliberate shift to reduce cyclicality. This focus ensures RBC is less exposed to industrial volatility while benefiting from the $1.5 trillion global aerospace market’s long-term expansion.

Why Buy Now? Valuation and Near-Term Catalysts

RBC Bearings trades at just 14.2x 2025E adjusted EPS, a discount to its five-year average of 16.5x. This valuation ignores the full impact of the preferred stock conversion, margin tailwinds, and backlog execution. Key catalysts for 2025 include:
1. Q1 2025 guidance of $415–420 million in revenue (up 7–8% year-over-year), supported by a robust backlog.
2. Free cash flow conversion of 115%+, enabling debt reduction and shareholder returns.
3. Margin expansion into 2026, as aerospace sales hit $900 million+ annually.

Conclusion: A Rare Blend of Resilience and Growth

RBC Bearings’ Q4 results reveal a company that’s mastered the art of turning margin discipline and aerospace tailwinds into shareholder value. Even with a modest revenue miss, its adjusted EPS beat, deleveraging trajectory, and secular growth in defense/aerospace make it a standout investment. At current valuations, the stock offers asymmetric upside: risks like near-term macro uncertainty are offset by its backlog strength, cost savings, and management’s proven execution.

For investors seeking exposure to a high-margin industrial leader with a clear path to 2025 outperformance, RBC Bearings is a buy. The question isn’t whether aerospace demand will grow—it’s whether you’ll miss the takeoff.

Action Item: Buy RBC Bearings (NASDAQ: RBC) for exposure to margin expansion, aerospace secular trends, and a balance sheet poised to deleverage into 2026. Set a target of $140–$150 based on 16x 2025E EPS.