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This ASX 200 stock is a hot favourite among top brokers this month

This reporting season is testing the faith in investors looking to chase the market higher, but there’s one stock that’s found redemption through its profit results.

The stock is the underperforming Reliance Worldwide Corporation Ltd (ASX: RWC) share price, which has lost around 40% of its value over the past year.

But the stock is making a comeback. The RWC share price jumped a further 3.4% during lunch time trade today to $3.61 after yesterday’s strong gains on the back of its full year earnings announcement.

In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index has only gained a modest 0.4% and top brokers reckon there’s plenty of room left for the Reliance Worldwide share price to climb.

It’s all about the outlook

While Reliance Worldwide’s profit numbers were in line with expectations, the analysts at Macquarie Group Ltd (ASX: MQG) called its outlook “solid” and believes there is around a 40% upside to the stock.

“The confident tone around the result and channel relationships together with an outlook that was comparatively firm in the face of a number of headwinds,” said the broker.

“We further believe there is a fair degree of prudency built into this range of outcomes in light of the levers available to the group through paring discretionary spend, synergy realisation and raw material tailwinds.”

Macquarie has an “outperform” recommendation on the stock with a 12-month price target of $4.80 per share.

Strong relationships lifts earnings confidence

Another broker who thinks the stock’s a bargain is JP Morgan with the broker reiterating its “overweight” recommendation on the stock with a price target of $4.50 a share.

JP Morgan echoed a similar confidence about the company’s key distributor relationships and said that Reliance Worldwide’s guidance doesn’t look over optimistic and may even be conservative to buffer against the impact of a no-deal Brexit.

Credit Suisse is also a backer of the stock as it believes Reliance Worldwide’s results addressed two key concerns of sceptics – poor cash conversion and customer ranging.

These concerns are overblown, according to the broker which kept its “outperform” recommendation on the stock with a price target of $4.25 a share.

More volatile than expected

But this doesn’t mean there aren’t potential headwinds for the plumbing products group. Credit Suisse noted that its Americas business only managed to increase sales by 8.3% in FY19 – that’s lower than the circa 12% average growth that management is targeting.

“Management explained that such an average should be expected to be contain many years below 10%, and several well above,” said Credit Suisse.

“While reasonable, this is perhaps more variability than we anticipated from a business with such a defensive end market.”

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Brendon Lau owns shares of Macquarie Group Limited. Connect with him on Twitter @brenlau.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Reliance Worldwide Limited. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia has recommended 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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