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Is this the most misunderstood ASX 200 stock?

The Reliance Worldwide Corporation Ltd (ASX: RWC) is copping another beating today even as many top brokers stuck to their “buy” recommendation on the stock following management’s shock profit downgrade.

The RWC share price slumped a further 1.2% to $3.58 in afternoon trade – taking its total losses this week to over 22%.

Reliance Worldwide has to be one of the most misunderstood stocks on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index!

Is stock de-rating justified?

I don’t blame shareholders from bailing (I did) as management downgraded its FY19 earnings before interest, tax, depreciation and amortisation (EBITDA) guidance to between $260 million and $270 million from its earlier forecast of $280 million to $290 million.

But there’s little doubt in the minds of some leading brokers that the dip is a buying opportunity.

JP Morgan is sticking to its “overweight” recommendation on the stock and pointed out that most of the downgrade was due to the lack of freezing temperatures across the US. Freezing temperatures often causes waterpipes to burst and that’s when Reliance Worldwide’s SharkBite product comes in handy.

Bad but not bad enough

The broker believes the market had already priced this event in but the market was caught off guard by the sharper than expected slowdown in the Australian residential market, delay in launching new products, weakness in its legacy business in Europe, the Middle East and Africa, and destocking by US retailers.

While JP Morgan cut its price target on the stock to $5.10 from $5.70 per share, the broker sees value in Reliance Worldwide.

Macquarie Group Ltd (ASX: MQG) echoed a similar sentiment as it continued to rate the stock as an “outperform”.

“The stock reaction was significant. The majority of FY19E EBITDA impacts should be transitory. Brexit continues to weigh, but we believe the valuation reset offers an opportunity – now at a 15% premium to ASX200 Industrial (avg since IPO +48%),” said Macquarie who has a 12-month price target of $5.90 per share.

“The balance sheet is solid, and JG integration is progressing well.”

Growth story still intact

Credit Suisse was also unwilling to change its “outperform” recommendation on the stock despite the bad news as it believes Reliance Worldwide’s growth story remains intact.

“Taken at face value, the outlook for the core US and John Guest businesses is unchanged, albeit with a rebasing required for the US nonrecurring items,” said Credit Suisse.

“We also assume that APAC and RWC’s legacy UK business worsens into FY20; although these never formed part of the long-term growth opportunity.”

The broker lowered its price target on the stock to $4.40 from $5.40 per share.

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Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Reliance Worldwide Limited. The Motley Fool Australia has recommended Macquarie Group Limited and Reliance Worldwide Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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