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Here's Why You Should Hold on to Rockwell Automation for Now

Zacks Equity Research

Rockwell Automation, Inc. ROK is poised well to benefit from focus on expanding the portfolio of products, solutions and services. Acquisitions and inorganic investments are also acting as tailwinds. However, the slowdown in U.S manufacturing activity and, weakness in automotive, semiconductor and chemical markets remain headwinds in the near term.

So far this year, the stock has gained 35.8, outperforming the industry’s growth of 23.3%.

Let’s delve deeper into the factors that substantiate the company’s Zacks Rank #3 (Hold).

Upbeat Guidance: Rockwell Automation anticipates fiscal 2020 earnings per share in the range of $8.70 to $9.10. The mid-point of the guidance range indicates year-over-year growth of 3%. Reported sales growth is expected at 2-5%. Sales for fiscal 2020 are expected at around $7 billion. Rockwell Automation anticipates segment operating margin at 21.5% in fiscal 2020. The Hybrid industries are expected to be up in low single-digits driven by growth in Life Sciences, Food & beverage, and Tire markets.

Positive Earnings Surprise History: Rockwell Automation has outpaced the Zacks Consensus Estimate in three of the trailing four quarters by 4.45%, on average.

Positive Growth Projections: The Zacks Consensus Estimate for earnings is currently pegged at $8.93 for fiscal 2020, suggesting growth of 3% from the prior fiscal. For fiscal 2021, the Zacks Consensus Estimate for earnings stands at $9.32, indicating growth of 4% for the fiscal 2020 estimate.

The stock also has long-term expected earnings per share growth rate of 8.2%

Return on Equity (ROE): The company’s trailing 12-month ROE of 99.3% reinforces its growth potential. The company’s ROE is higher than the ROE of 68.1% for the industry, highlighting its efficiency in utilizing shareholders’ funds.

Growth Drivers in Place

Rockwell Automation’s strong financial position enables it to invest in organic growth and return excess cash to share owners through dividends and share repurchases. The company continues to expand portfolio of hardware and software products, solutions and services. It is likely to witness above-market growth driven by share gains in core platforms and double-digit growth in Information Solutions and Connected Services. Moreover, focus on productivity and actions to mitigate the impact of tariffs are likely to drive results.

In October, Rockwell Automation acquired MESTECH Services. The buyout enhances the company’s capabilities to profitably grow Information Solutions and Connected Services globally and strengthen its ability to help customers execute digital transformation initiatives. Rockwell Automation will be able to leverage MESTECH’s presence in India, which is one of its growing markets.

In January 2019, the company acquired Emulate3D, an innovative engineering software developer whose products digitally simulate and emulate industrial automation systems. In 2018, the company acquired PTC, which is a leader in the Industrial Internet of Things and augmented reality. The company’s acquisition pipeline remains robust.

Rockwell Automation has entered into a joint venture (JV) agreement with Schlumberger to form Sensia — the first fully integrated digital oilfield automation solutions provider. Sensia will operate as an independent entity, with Rockwell Automation owning 53% and Schlumberger owning the balance. Sensia is expected to generate initial annual revenues of approximately $400 million.

However, there are a few factors that are impeding growth in the near term.

The recent slowdown in U.S manufacturing activity remains a headwind as Sales in the domestic markets accounts for roughly 54% of Rockwell Automation’s total sales. Further, sluggish automotive, semiconductor and chemical markets remain concerns.

Stocks to Consider

Some better-ranked stocks in the Industrial Products sector are Northwest Pipe Company NWPX, Tennant Company TNC and Sharps Compliance Corp SMED. All of these stocks carry a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Northwest Pipe has an expected earnings growth rate of 15.5% for the current year. The stock has appreciated 47% in a year’s time.

Tennant has a projected earnings growth rate of 29.8% for 2019. The company’s shares have rallied 28% over the past year.

Sharps Compliance has an estimated earnings growth rate of 500% for the ongoing year. The company’s shares have gained 18% in the past year.

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