Regal Rexnord: Navigating Short-Term Pain for Long-Term Gain in Industrial Automation

In the ever-evolving landscape of industrial manufacturing, Regal Rexnord (RRX) stands at a pivotal crossroads. The company's 2024 financial performance and strategic initiatives underscore a compelling narrative: a business actively mitigating near-term headwinds while positioning itself to capitalize on secular growth tailwinds in automation and data center infrastructure. With institutional ownership exceeding 85% and a debt-reduction strategy on track, Regal Rexnord's stock appears undervalued relative to its long-term potential.

Tariff Mitigation and Restructuring: A Calculated Path to Resilience

Regal Rexnord's 2024 annual report revealed an adjusted gross margin of 37.8%, a 210-basis-point improvement year-over-year, driven by $101 million in cost synergies. However, the company faces a $60 million annualized cost burden from U.S. tariffs, a challenge it is addressing through supply chain realignments, production relocations, and pricing adjustments. These measures are expected to render the company "price/cost neutral" by year-end 2025 and "margin neutral" by mid-2026. The CFO has explicitly stated that mitigation actions will neutralize tariff impacts on adjusted EBITDA and earnings per share in 2025, signaling confidence in operational agility.

The company's debt-reduction efforts further bolster its resilience. Regal Rexnord paid down $938 million of gross debt in 2024, surpassing its target, while maintaining a disciplined approach to capital allocation. This financial prudence positions the firm to navigate macroeconomic volatility without sacrificing investment in growth areas.

Strategic Pivot to Automation and Data Center Infrastructure

Regal Rexnord's Automation & Motion Control segment, despite discrete automation challenges, delivered a 21.6% adjusted EBITDA margin in 2024. The segment's focus on advanced industries-such as factory automation and humanoid robotics-aligns with surging demand. Notably, the company already generates over $20 million annually in sales from humanoid robot components, a niche market poised for exponential growth.

The company's offerings in data center infrastructure, including controllers, precision motors, and actuators, also position it to benefit from the AI and cloud computing boom. While these applications remain a smaller portion of revenue today, their strategic importance cannot be overstated. As global data center demand accelerates, Regal Rexnord's expertise in motion control and automation will likely translate into outsized gains.

Financial Resilience and Institutional Conviction

Regal Rexnord's financials reflect a business balancing short-term discipline with long-term ambition. Adjusted free cash flow in Q4 2024 rose 8.4% year-over-year to $185.3 million, while full-year operating cash flow reached $609.4 million. These figures highlight the company's ability to generate liquidity even amid revenue declines-2024 total revenue fell 3.5% to $6,033.8 million, primarily due to the divestiture of industrial motors and generators businesses.

Institutional ownership of 85.03%, held by heavyweights like Vanguard and BlackRock, underscores strong conviction in Regal Rexnord's strategic direction. Such alignment with institutional investors often signals confidence in management's ability to execute complex transformations-a critical factor in assessing undervaluation claims.

Conclusion: A Case for Long-Term Optimism

Regal Rexnord's 2024 results and strategic pivot demonstrate a company navigating short-term pain with operational rigor while laying the groundwork for long-term gain. By mitigating tariff impacts, accelerating automation investments, and capitalizing on data center growth, the firm is well-positioned to deliver value as secular trends gain momentum. With improving margins, robust free cash flow, and institutional backing, Regal Rexnord's current valuation appears to discount its future potential at an inopportune rate. For investors with a multi-year horizon, this presents a compelling opportunity to participate in a transformation story with durable, industry-defining upside.