On Mar 21, we maintained our Neutral recommendation on leading global provider of industrial automation power, control, and information solutions, Rockwell Automation Inc. (ROK), on the basis of expected benefits from expansion in the emerging markets, investment in Logix, recent acquisition of China-based medium voltage drives business, offset by concerns regarding the uncertain global economic scenario, further deterioration in the Chinese economy and margin headwinds in the form of increased growth spending.
Why Reiterated?
Rockwell Automation reported EPS of $1.23 in the first quarter of fiscal 2013, down 6% year over year and short of the Zacks Consensus Estimate. Sales edged up 1% to $1.489 billion in the quarter, ahead of the Zacks Consensus Estimate.
In a bid to expand its business in the Asia-Pacific region, Rockwell Automation acquired the medium voltage drives business of China-based Harbin Jiuzhou Electric in Oct 2012. The acquisition will enable Rockwell to design, engineer as well as manufacture medium voltage drives and power solutions. The ever-expanding customer base in the Asia-Pacific region has resulted in the surge in demand for efficient medium voltage drives. Given the higher demand for Rockwell’s medium voltage drives, the business is growing significantly.
Logix is the technology foundation that enabled Rockwell Automation to become an industry leader for batch process applications and attain a competitive edge against traditional Distributed Control Systems (DCS) providers for continuous process applications. Logix organic sales increased 8% in 2012 compared to 2011 and 5% in the most recent quarter. Rockwell Automation has plans to invest in Logix and expand the served market.
Rockwell remains committed to increasing its international presence, particularly in the emerging markets. Infrastructure investments are expected to continue in the emerging markets, and oil and gas and mining are critical to the economic development. Furthermore, rising standards of living and a growing middle class boost the need for consumer products manufacturing.
On the flipside, moderating global economic growth and uncertainty in the global economic scenario can lead to cautious capital spending, limiting Rockwell Automation’s near-term revenue visibility. Furthermore, Rockwell Automation needs to consistently develop advanced technologies for new products and product enhancements to withstand competition. Developing new products requires high levels of innovation, and the development process is often lengthy and costly. The company’s increased spending to support growth will continue to put pressure on margins in the near term.
Rockwell Automation’s performance in China was weak in the fourth quarter with organic sales down 13% due to soft economic growth, lack of credit availability, and project delays. If China’s economy fails to reaccelerate in 2013, it will affect Rockwell Automation’s results.
Other Stocks to Consider
Rockwell Automation currently retains a Zacks Rank #3 (Hold). Other stocks in the same industry with favorable Zacks ranks are Capstone Turbine Corp. (CPST), Franklin Electric Co., Inc. (FELE) and Chicago Bridge & Iron (CBI), which carry a Zacks Rank #2 (Buy).
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