Insights

Is Rockwell Automation Undervalued Now?

Rockwell Automation (NYSE: ROK) is one of the most exciting stocks in the industrial sector. It’s the leading U.S. player in automation, and it’s at the vanguard of the movement toward improving manufacturing productivity in America via introducing automated processes.
Its long-term growth prospects look excellent, but the company is being hit with ongoing supply chain difficulties in the near term, and investors recently dumped the stock. Is now the time to buy in with a long-term view, or should investors continue to shy away from the stock? Here’s the lowdown.
Image source: Getty Images.

What happened in Rockwell Automation’s second quarter
In a nutshell, Q2 earnings came in lower than expected, and management lowered its full-year guidance. The main issue is the well-documented supply chain issues and cost inflation bedeviling the global economy right now. Rockwell is being acutely hit in its automotive and e-commerce (warehouse automation) markets, where semiconductors and other components are negatively impacting its ability to ship into those end markets.
As such, management made significant reductions to its full-year guidance. As you can see below, it’s a question of lower sales and lower margins. 

Full-Year 2022 Guidance

April Guidance

January Guidance

Notes*

Organic Growth

10%-14%

14%-17%

Full-year industry outlooks cut for automotive, semiconductor, e-commerce, food & beverage, life sciences, mining, and chemicals. Maintained outlook for tire and oil and gas.

Segment Operating Margin

20%

21.50%

Margin is impacted by the inability to shift higher-margin products and a shift in sales mix to lower-margin lifecycle services revenue.

Adjusted EPS

$9.20-$9.80

$10.50-$11.10

Lowered due to revenue growth reduction and margin.

Free Cash Flow as a % of Adjusted Income

85%

90%

More working capital is needed to have high inventory levels to support demand and ensure shipments.

Data source: Rockwell presentations. *Notes by the author based on earnings presentations.
The case for buying Rockwell stock 
It doesn’t make happy reading for investors; then again, investing isn’t a beauty contest. It’s about finding good value investments. There is a case for buying the stock right now in this context. The crux of the bulls’ case is that Rockwell’s orders growth remains robust (up 37% on a year-over-year basis in the second quarter) and the supply chain problems, although significant, are temporary. Moreover, Rockwell could see a margin boost in connection with sales improvements when semiconductors and other components become more available. 
Meanwhile, no one doubts the importance of capital investment in automation. There’s an obvious need for the semiconductor industry to invest, and underlying demand for cars (in particular electric vehicles) remains strong, so automotive companies will increase investment over time. Across all of Rockwell’s end markets, pent-up demand will likely release at some point, and the company will convert its growing backlog into sales in the future. 
Image source: Getty Images.

It’s a compelling case, and if taken to its fruition, it implies a strong recovery in Rockwell’s fiscal 2023. Indeed, CFO Nick Gangestad said on the earnings call that he expects “margins to improve sequentially” through the third and fourth quarters as pricing actions take hold to counteract cost increases. 
There is a downside risk
That said, there’s no shortage of downside risk to the bulls’ outlook. Rockwell is a company whose revenue relies highly on its customers’ capital spending plans. Unlike operating spending, capital spending plans can be quickly shelved or delayed in an economic slowdown. Consequently, if the global economy hits a rough patch due to the persistent supply chain difficulties — the fallout from the war in Ukraine, rising rates, the unwinding of quantitative easing, extended lockdowns in China, or any other event you can think of — Rockwell will feel the pain first. 
Buy or sell?
Ultimately, it boils down to a risk/reward calculation — and frankly, the stock price reduction isn’t enough to make the stock a good value right now. Based on the midpoint of the reduced guidance, i.e., $9.60, and Rockwell’s current stock price of $200, the stock trades at nearly 21 times its estimated fiscal 2022 earnings. That’s probably close to a fair value for the risk involved. Still, plenty of other stocks offer a better value for carrying the risk of a slowdown in the economy in the current environment. As such, Rockwell is still one for the watch list.
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. –

Rockwell Automation (NYSE: ROK) is one of the most exciting stocks in the industrial sector. It’s the leading U.S. player in automation, and it’s at the vanguard of the movement toward improving manufacturing productivity in America via introducing automated processes.

Its long-term growth prospects look excellent, but the company is being hit with ongoing supply chain difficulties in the near term, and investors recently dumped the stock. Is now the time to buy in with a long-term view, or should investors continue to shy away from the stock? Here’s the lowdown.

Image source: Getty Images.

What happened in Rockwell Automation’s second quarter

In a nutshell, Q2 earnings came in lower than expected, and management lowered its full-year guidance. The main issue is the well-documented supply chain issues and cost inflation bedeviling the global economy right now. Rockwell is being acutely hit in its automotive and e-commerce (warehouse automation) markets, where semiconductors and other components are negatively impacting its ability to ship into those end markets.

As such, management made significant reductions to its full-year guidance. As you can see below, it’s a question of lower sales and lower margins. 

Full-Year 2022 Guidance

April Guidance

January Guidance

Notes*

Organic Growth

10%-14%

14%-17%

Full-year industry outlooks cut for automotive, semiconductor, e-commerce, food & beverage, life sciences, mining, and chemicals. Maintained outlook for tire and oil and gas.

Segment Operating Margin

20%

21.50%

Margin is impacted by the inability to shift higher-margin products and a shift in sales mix to lower-margin lifecycle services revenue.

Adjusted EPS

$9.20-$9.80

$10.50-$11.10

Lowered due to revenue growth reduction and margin.

Free Cash Flow as a % of Adjusted Income

85%

90%

More working capital is needed to have high inventory levels to support demand and ensure shipments.

Data source: Rockwell presentations. *Notes by the author based on earnings presentations.

The case for buying Rockwell stock 

It doesn’t make happy reading for investors; then again, investing isn’t a beauty contest. It’s about finding good value investments. There is a case for buying the stock right now in this context. The crux of the bulls’ case is that Rockwell’s orders growth remains robust (up 37% on a year-over-year basis in the second quarter) and the supply chain problems, although significant, are temporary. Moreover, Rockwell could see a margin boost in connection with sales improvements when semiconductors and other components become more available. 

Meanwhile, no one doubts the importance of capital investment in automation. There’s an obvious need for the semiconductor industry to invest, and underlying demand for cars (in particular electric vehicles) remains strong, so automotive companies will increase investment over time. Across all of Rockwell’s end markets, pent-up demand will likely release at some point, and the company will convert its growing backlog into sales in the future. 

Image source: Getty Images.

It’s a compelling case, and if taken to its fruition, it implies a strong recovery in Rockwell’s fiscal 2023. Indeed, CFO Nick Gangestad said on the earnings call that he expects “margins to improve sequentially” through the third and fourth quarters as pricing actions take hold to counteract cost increases. 

There is a downside risk

That said, there’s no shortage of downside risk to the bulls’ outlook. Rockwell is a company whose revenue relies highly on its customers’ capital spending plans. Unlike operating spending, capital spending plans can be quickly shelved or delayed in an economic slowdown. Consequently, if the global economy hits a rough patch due to the persistent supply chain difficulties — the fallout from the war in Ukraine, rising rates, the unwinding of quantitative easing, extended lockdowns in China, or any other event you can think of — Rockwell will feel the pain first. 

Buy or sell?

Ultimately, it boils down to a risk/reward calculation — and frankly, the stock price reduction isn’t enough to make the stock a good value right now. Based on the midpoint of the reduced guidance, i.e., $9.60, and Rockwell’s current stock price of $200, the stock trades at nearly 21 times its estimated fiscal 2022 earnings. That’s probably close to a fair value for the risk involved. Still, plenty of other stocks offer a better value for carrying the risk of a slowdown in the economy in the current environment. As such, Rockwell is still one for the watch list.

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Trade The World Anywhere & Anytime!

Mobile app platform with over 50,000 global listed securities across 12 markets (over 70% global market capitalisation), right from your Android or iOS device.

Integrated with exclusive trading idea and investment analysis tools to help you find actionable insight on virtually every financial instrument across our 12 global markets, to help you optimise your trading strategies.

Refer Your Friends

Tell your friends about Monex and gift them FREE access to our trading tools.

  • This field is for validation purposes and should be left unchanged.

We respect your privacy and will only send this one email notification to your friends. 

Share With Your Friends

Monex Trading Tools Access and Usage Terms

The Monex Trading Tools (referred to as ‘tools’ hereafter) are available to you inside your client portal;

To activate access to the tools, you must have a verified and approved trading account and have made a deposit of at least AUD $1000.

An active and funded account with a positive trading balance is required to continue to have access to the tools;

Although the tools are available to you, Monex Securities may at it’s discretion disable access to the tools in the future;

Monex Securities reserves the right to change these terms and conditions from time to time, as it sees fit, without notice.

FREE AAPL, TSLA, AMZN, PFE or MRO Share(s)
REGISTER TO BE ELIGIBLE FOR FREE SHARES
TRAVEL ACROSS THE FINANCIAL WORLD
Act Fast - Promotion Ends In
Click Here To Get Started
FREE AAPL, TSLA, AMZN, PFE or MRO Share(s)
REGISTER TO BE ELIGIBLE FOR FREE SHARES
TRAVEL ACROSS THE FINANCIAL WORLD
Act Fast - Promotion Ends In
Click Here For More Info