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Rockwell Automation (ROK) Strong on Investments & Acquisitions

Zacks Equity Research
Rockwell Automation's (ROK) performance likely to be supported by strength in heavy industries, growing investment and acquisitions.

On Apr 30, we issued an updated research report on Rockwell Automation, Inc. ROK. The company is poised to gain from strength in heavy industries, growing investment and acquisitions in the days ahead. However, its results may be affected by a softer automotive market and currency fluctuations.

Let’s illustrate these factors in detail.

Strength in Heavy Industries Fuels Growth

Heavy industries performed well in second-quarter fiscal 2019, backed by strength in oil and gas, mining and pulp and paper. In addition, growth in emerging markets will create demand for semiconductor and other heavy industries. For fiscal 2019, Rockwell Automation expects its adjusted EPS in the band of $8.85-$9.15, which calls for 14.6% year-over-year growth at the mid-point. It anticipates organic sales growth of 3.7-5.3%.
 
The company is poised to benefit from its focus on broadening the portfolio of hardware and software products, solutions and services. Further, significant investments to globalize manufacturing and develop products will stoke 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, as well as contribution from acquisitions and inorganic investments.

Rockwell Automation also expects segment operating margin to expand to 22% in the current fiscal. Moreover, focus on productivity and actions to mitigate the impact of tariffs will likely be conducive to growth.

Investments & Acquisitions Provide Support

In fiscal 2018, Rockwell Automation made $1-billion equity investment in PTC. Notably, PTC is the leader in the Industrial Internet of Things and augmented reality. The company’s investment and alliance with PTC will accelerate growth for both companies.
 
On Jan 28, 2019, Rockwell Automation announced the takeover of a U.K.-based software company, Emulate3D. This acquisition is in sync with the company’s growth strategy. Further, later in February, Rockwell Automation entered into a joint venture (JV) agreement – Sensia -- with Schlumberger SLB. 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. The company is on track to deliver growth on PTC and the Sensia deal.
 
Moreover, Rockwell Automation is actively engaged in the evaluation of inorganic opportunities to accelerate the Connected Enterprise strategy. The company witnessed profitable growth across all regions, led by strong process industry performance in fiscal second-quarter. Growth in Information Solutions and Connected Services was witnessed, reflecting adoption of the Connected Enterprise.

Tariffs Remain a Woe

Rockwell Automation along with iRobot Corporation IRBT and Hollysys Automation Technologies Ltd. HOLI belong to the Industrial Automation and Robotics industry, expects to offset the negative impact of tariffs through the implementation of supply-chain alternatives, negotiations with vendors and price adjustments on effective products. Nevertheless, the company expects tariffs to have an unfavorable impact in the fiscal second quarter due to the timing of selective price increases.

Concerns Over Softer Automotive Market

Rockwell Automation’s fiscal second-quarter 2019 results were affected by weaker-than-expected automotive sales. The company expects prevailing softness in the automotive market to hurt its performance in fiscal 2019. Moreover, the company will bear the brunt of currency fluctuations in the fiscal.

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