Rockwell Automation Bets on Heavy Industries Amid High Costs

On Aug 29, we issued an updated research report on Rockwell Automation, Inc. ROK. The company will likely benefit from the broadening of its product portfolio, solutions and services, and growth investments. Strength in heavy industries and acquisitions will also aid growth. However, its results will likely be affected by the impact of the prolonged trade war, slowdown in the U.S manufacturing activity, and weak automotive and semiconductor markets.
Let’s illustrate these factors in detail.

Two Pronged Impacts of the Trade War

Uncertainty with respect to global trade is influencing customers’ investment decisions, particularly those related to the timing of capital investments, which is expected to weigh on the company’s performance. During the third-quarter fiscal 2019 earnings release, it lowered earnings per share projection for fiscal 2019 to $8.50-$8.70 from the prior $8.85-$9.15. Also, input cost inflation due to the implementation of tariffs will likely limit Rockwell Automation’s margins.

Manufacturing Activity Weak, Auto & Semiconductor Markets Drag

Industrial production declined 0.2% in July. This followed a decline of 1.2% in the fiscal second quarter — marking its second consecutive quarterly decrease. The Manufacturing Purchasing Managers’ Index (PMI) published by the Institute for Supply Management (“ISM”) for July was 51.2%, lower than 51.7% in June and 52.1% in May. Even though the reading remains above 50, which indicates expansion, there has been a slowdown over the past few months. This is a concern for Rockwell Automation. On top of this, the prevailing softness in the automotive market as well as the overall slowdown in the global semiconductor, and food and beverage markets remains a headwind.

New Products, Heavy Industries to Aid Growth

For Rockwell Automation, heavy industries will be the primary catalyst. In oil and gas, the company is witnessing strong growth across all regions as customers are focusing on productivity, improvements and digitization initiatives. The North American pulp and paper market is performing well. Robust growth in mining is likely to be aided by investments in iron ore and copper; electric vehicle-related commodities; and investments on digitization.

The company will likely benefit from its focus on broadening the portfolio of hardware and software products, solutions, and services. Further, significant investments to globalize manufacturing, product development and customer-facing resources will drive growth. The company is likely to witness above-market growth through a combination of share gains in core platforms, double-digit growth in Information Solutions and Connected Services, and contribution from acquisitions and inorganic investments. Rockwell Automation also expects segmental operating margin to expand to 22% in fiscal 2019. The focus on productivity and initiatives to mitigate the impact of tariffs are expected to drive growth.

Investments & Acquisitions Provide Support

In February 2019, Rockwell Automation entered a joint venture (JV) agreement with Schlumberger, named Sensia — the first fully integrated digital oilfield automation solutions provider. The transaction is expected to close in calendar year 2019, subject to regulatory approvals and other customary conditions. Sensia will operate as an independent entity, with Rockwell Automation owning 53% and Schlumberger owning the balance. As part of the deal, Rockwell Automation will pay $250 million to Schlumberger. Sensia is expected to generate initial annual revenues of approximately $400 million.

Rockwell Automation accelerated investments to expand process  capabilities to accelerate growth. The company is also actively engaged in the evaluation of inorganic opportunities to accelerate the Connected Enterprise strategy. Meanwhile, it continues to look for acquisitions.
 
Price Performance

 

Over the past year, Rockwell Automation’s shares have dipped 16.4% compared with the industry’s decline of 23.3%.

Zacks Rank & Key Picks

Rockwell Automation currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the Industrial Products sector are Zebra Technologies Corporation ZBRA, Avery Dennison Corporation AVY and Tetra Tech, Inc. TTEK. While Zebra Technologies currently sports a Zacks Rank #1 (Strong Buy), Avery Dennison and Tetra Tech carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Zebra Technologies has a projected earnings growth rate of 16.71% for the current year. The stock has gained 21% in a year.

Avery Dennison has an estimated earnings growth rate of 8.42% for 2019. The company’s shares have gone up 9.3% in the past year.

Tetra Tech has an expected earnings growth rate of 15.97% for the ongoing year. The stock has appreciated 15.6% over the past year.

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Rockwell Automation, Inc. (ROK) : Free Stock Analysis Report
 
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