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RBC Bearings' stock has soared since its initial public offering two years ago, when it was offered at $14.50 per share. In recent periods, it seems as though investors have begun booking their capital gains. But the quantitative model employed by the Forbes Growth Investor suggests that these sellers may miss out on even more profits.

RBC Bearings (nasdaq: ROLL - news - people ) makes plain, roller and ball bearings, which are used to reduce friction in various kinds of mechanical systems. Half of fiscal 2007 sales were generated from aerospace and defense customers, who use bearings in commercial, private and military aircraft, as well as in naval vessels, armored vehicles, guided weaponry and satellites.

Major customers in this group include Airbus, Boeing (nyse: BA - news - people ), General Electric (nyse: GE - news - people ), Lockheed Martin (nyse: LMT - news - people ), Raytheon (nyse: RTN - news - people ) and United Technologies (nyse: UTX - news - people ).

The other half of fiscal 2007 sales came from a range of diversified industrial customers and aftermarket distributors including manufacturers of equipment used in construction, mining, oil and natural gas extraction, trucking and semiconductor machinery. Large customers in this group include Applied Materials (nasdaq: AMAT - news - people ), Caterpillar (nyse: CAT - news - people ), Hitachi Construction, Komatsu and Parker-Hannifin (nyse: PH - news - people ).

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ROLL operates four distinct business segments. The plain bearings segment is the largest, accounting for 47% fiscal 2007 sales. Plain bearings are self-lubricating or metal-to-metal and include rod end bearings, spherical plain bearings and journal bearings. These bearings are used to correct the expected misalignments that occur in mechanical components.

The roller bearings segment accounted for 30.1% of sales. This segment makes tapered roller bearings used in truck axles, as well as needle roller bearings, needle bearing track rollers and cam followers, which are used in the aerospace, defense and diversified industrial markets.

The ball bearings segment produced 16.5% of sales. These bearings are used in high-speed applications. They include high precision aerospace ball bearings, airframe control ball bearings, thin section ball bearings and a general line of industrial ball bearings, which are sold to aftermarket customers. Finally, the "other" segment, which produced 6.4% of sales, includes precision linear products and machine tool collets.

Aerospace and defense related sales jumped 26% in fiscal 2007, driven by programs to modernize and expand commercial aircraft fleets and refurbish and replace aging defense equipment. But sales to diversified industrial customers grew just 0.3% due largely to a sharp volume decline in the class 8 truck market.

In an effort to cut costs, ROLL shut down and consolidated certain operations. The restructuring had little impact on production as fiscal Q4 net sales increased 7% year-over-year to $81 million. Plain bearings segment sales grew 20.1% to $39.7 million. Roller bearings and ball bearings sales declined 8.3% and 3.0%, respectively, to $23.2 million and $12.7 million. The "other" segment saw sales climb 26.2% to $5.5 million.

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ROLL's gross profit margin expanded 445 basis points to 35.24% driven by higher volumes, a more favorable mix and continued cost reductions. The pro forma operating profit margin expanded 345 basis points to 21.24% from 17.79%.

Proceeds from a secondary stock offering were used to pay down debt. This reduced interest expense by 71% from the prior year period and helped boost pro forma net income 54.19% to $10.36 million or 48 cents per share. GAAP net income was $6.72 million or 31 cents per share.

Any continued weakness in the diversified industrials markets should be offset by strength in the aerospace and defense markets. In fact, backlog is up 9.8% year-over-year to $176.6 million. ROLL built a new aerospace bearing manufacturing facility in Connecticut, which will begin operating in the fall.

It also recently completed facility expansion projects in South Carolina and Mexico. Recent acquisitions include Phoenix Bearings and Coastal Bearing Services. Management believes favorable sales trends combined with further cost savings will generate an additional 150 basis point expansion to the gross profit margin in fiscal 2008.

Samuel Ro is an equity analyst and for Forbes Growth Investor and Forbes Special Situation Survey. Click here for details on model portfolio holdings and recent buys and sells.

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