Rockwell Automation to Gain on Products and Acquisitions

On Nov 14, we issued an updated research report on Rockwell Automation, Inc. ROK. The company is likely to benefit from product portfolio expansion, solutions and services, and growth investments. Focus on productivity will also drive margins. However, its results are likely to be affected by the impact of the prolonged trade war, slowdown in the U.S manufacturing activity and weakness in few end markets.

Let’s illustrate these factors in detail.

Upbeat Fiscal 2020 Outlook Despite Few Weak Markets

Rockwell Automation expects discrete end markets to be down low single-digits in fiscal 2020 as the automotive sector is expected to remain flat while semiconductor markets are anticipated to be down in mid single-digits.  Process industries are expected to remain flat in fiscal 2020 compared with the prior fiscal. Chemical markets are projected to be down low single-digits, which is likely to offset growth in Oil & Gas and Mining/Aggregate/Cement (MAC). The recent slowdown in manufacturing activity also remains a concern.

However, Hybrid industries (which include Food & Beverage, Life Sciences and Household and Personal Care, among others) are expected to be up in low single-digits driven by growth in Life Sciences, Food & beverage, and Tire markets.

Uncertainty with respect to global trade is influencing customers’ investment decisions, particularly those related to the timing of capital investments. This is expected to weigh on the company’s performance. Further, input cost inflation due to the implementation of tariffs is likely to limit Rockwell Automation’s margins. The company’s focus on productivity and initiatives to mitigate the impact of tariffs are expected to drive growth.

The company anticipates fiscal 2020 earnings per share in the band of $8.70-$9.10. The mid-point of the guidance range indicates a year-over-year growth of 3%. Reported sales growth is expected in the range of 2-5%. Sales for fiscal 2020 are expected at around $7 billion. Rockwell Automation expects segment operating margin at 21.5% in fiscal 2020.

New Products, Investments & Acquisitions to Aid Growth

The company will benefit from 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 are likely to 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.

The company’s strong financial position enables it to invest in organic growth and return excess cash to share owners in the form of dividends and share repurchases. Rockwell Automation’s board of directors announced a hike of 5% in its quarterly dividend. Over the last five fiscal years, the company has returned approximately $6 billion of cash to shareowners through dividends and share repurchases.

In October, Rockwell Automation acquired MESTECH Services, a global provider of Manufacturing Execution Systems / Manufacturing Operations Management, digital solutions consulting, and systems integration services. The acquisition enhances the company’s capabilities to profitably grow Information Solutions and Connected Services globally and accelerate 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.

Price Performance

Over the past year, Rockwell Automation’s shares have gained 15.7% compared with the industry’s growth of 4.7%.

Zacks Rank & Key Picks

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

Some better-ranked stocks in the Industrial Products sector are Northwest Pipe Company NWPX, Tennant Company TNC and Casella Waste Systems, Inc. CWST. While Northwest Pipe and Tennant sport a Zacks Rank #1 (Strong Buy), Casella Waste Systems carries a Zacks Rank #2 (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 15.8% for the current year. The stock has appreciated 39% 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.

Casella Waste Systems has an estimated earnings growth rate of 37.7% for the ongoing year. The company’s shares have gained 34% in the past year.

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