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Rockwell Automation (ROK) Down 11.6% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Rockwell Automation (ROK). Shares have lost about 11.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Rockwell Automation due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Rockwell Automation Beats on Q3 Earnings, Trims View

Rockwell Automation delivered adjusted earnings of $2.40 in third-quarter fiscal 2019 (ended Jun 30, 2019), which surpassed the Zacks Consensus Estimate of $2.29 and improved 11% from the prior-year quarter figure of $2.16. Lower incentive compensation expense, higher organic sales, and lower share count, partially offset by higher net interest expense led to the bottom-line improvement.

Including one-time items, the company reported earnings of $2.20 per share compared with $1.58 reported in the year-ago quarter.

Total revenues came in at $1,665 million, down 2% year over year, falling short of the Zacks Consensus Estimate of $1,728 million. Organic sales growth in the quarter was 0.5% while foreign currency translations had a negative impact of 2.5%. During the quarter, heavy industries, including oil and gas, pulp and paper, and mining, and life sciences, witnessed double-digit growth while automotive, semiconductor, and food and beverage displayed sluggishness.

Operational Update

Cost of sales decreased 2% year over year to $935 million. Gross profit decreased 2% to $730 million from $745 million reported in the year-ago quarter. Selling, general and administrative expenses declined 10% year over year to $362 million.

Consolidated segment operating income totaled $396 million, up 4% from the prior-year quarter’s figure of $383 million. Segment operating margin was 23.8% in the fiscal third quarter, up 125 basis points from the year-earlier quarter aided by lower incentive compensation expense, partially offset by higher investment spending.

Segment Results

Architecture & Software: Net sales dropped 5% year over year to $748 million in the third quarter. While organic sales were down 1.9%, currency translation had a negative impact of 2.8%. However, acquisition contributed 0.1%. Segment operating earnings came in at $2237 million compared with $239 million reported in the prior-year quarter. Segment operating margin was 29.8% in the reported quarter compared with 30.4% in the prior-year quarter.

Control Products & Solutions: Net sales improved 0.2% year over year to $917 million in the reported quarter. Organic sales increased 2.7% while currency translation reduced sales by 2.5%. Segment operating earnings advanced 20% to $173 million from $144 million in the year-ago quarter. Segment operating margin came in at 18.5% compared with 15.7% in the prior-year quarter.

Financials

As of Jun 30, 2018, cash and cash equivalents totaled $789 million, up from $619 million as of Sep 30, 2018. As of Jun 30, 2018, total debt was $2,240 million, up from $1,776 million as of Sep 30, 2018.

Cash flow from operations in the nine months ended Jun 30, 2019 was $707 million lower than the $937 million in the comparable prior-year period. Return on invested capital was 39% as of Jun 30, 2019 compared with 43.8% as of Jun 30, 2018.

During the reported quarter, Rockwell Automation repurchased 1.5 million shares for $246 million. As of the quarter end, $333 million was available under the existing share-repurchase authorization. The company’s board also authorized an additional $1.0 billion for share repurchases.

Guidance Trimmed

Uncertainty with respect to global trade is influencing customers’ investment decisions, particularly those related to the timing of capital investments. Moreover, considering the year-to-date results, the company now anticipates earnings per share in fiscal 2019 in the band of $8.50-$8.70, down from the prior $8.85-$9.15. Organic sales growth is guided at 1.5% year over year, down from the prior 3.7-5.3%.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -13.77% due to these changes.

VGM Scores

At this time, Rockwell Automation has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Rockwell Automation has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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