Rockwell Automation: A Slow But Steady Growth Story – Seeking Alpha

Rockwell Automation (ROK) is an industrial automation company. Its revenue is growing at a CAGR of 4.40% in the past ten years, and EBITDA is growing at a CAGR of 10.62% in the same time period. Rockwell is a medium-growth company. Its stock has created a 52-week high of $191.96 and a 52-week low of $141.46. Currently the stock is trading near $165, and around this price the stock is attractively valued. Long-term investors can accumulate the stock around the current price.

Rockwell is a provider of industrial automation and information solutions. It has two operating segments, which are Architecture & Software, and Control Products & Solutions. The company has some excellent products, which are its growth drivers for the future. The products are factory analytics, advanced process control products, and advanced motion control products.

Rockwells FactoryTalk Analytics platform has the potential to become one of its top growing products. This platform offers solutions that include assessment of machine health and identification of machine maintenance needs. The company produces insightful information from raw data at the factory level on plant floors across the globe. It has standardized its operation on its EtherNet/IP system. The EtherNet/IP system connects devices like motor starters and sensors with the computers at the enterprise level. After assessing machine health and its maintenance needs, the analytics platform sends this information to the enterprise from the plant floor.

Rockwells advanced process control products Pavilion8 and PlantPAx are MPC (model predictive control) products that will see high growth in the future. In today's competitive world many companies are shifting their operations from product-centric to customer-centric and demand-driven. The Pavilion8 software platform helps the companies achieve this. The platform has modules to analyze, control, monitor and visualize factory operations in such a way that it is possible to control manufacturing according to demand. PlantPAx MPC software platform is designed to run within standard Logix hardware. This platform helps the companies manage most challenging and complex control problems by responding more quickly to the demands of the customers and to the fast-changing product specifications.

The companys Servo drives, Servo motors and actuators are its advanced motion control solutions. Motion control is a sub-field of automation and an important part of robotics where machines move in a controlled manner. Since motion control is a part of robotics, Rockwells Servo family of products are actually robotics products. And since robotics is a high-growth sector, Servo will see growing revenue in the years to come. According to a report, The robotics market was valued at USD 31.78 billion in 2018 and is expected to register a CAGR of 25% over the forecast period of 2019-2024. In addition to Servo, Rockwells iTRAK intelligent track system is another intelligent motion control solution. The iTRAK system is a modular and scalable motion control system that substitutes rotary-driven chains, belts, and gears of the past. Instead, it is controlled by simple software profiles. The iTRAK system will also see increasing revenue in the coming years.

Industrial automation is a highly competitive business. Rockwell primarily competes with ABB Ltd (ABB), Cognex Corporation (CGNX), Honeywell International (HON), Siemens AG (OTCPK:SIEGY) and Mitsubishi Electric Corporation (OTCPK:MIELY). Some of the companys competitors, which are large diversified companies, also have business interests outside of industrial automation. A few smaller companies that compete with Rockwell, like Cognex, have business interests only in industrial automation. These companies have a limited portfolio of industrial automation products. Rockwells competitive advantage is its large portfolio of industrial automation products, technology differentiation and domain expertise.

In the third quarter of fiscal 2019 Rockwell delivered mixed results. The company reported fiscal 2019 Q3 revenue of $1,665 million, down 2% YoY from $1,699 million in the year-ago quarter. However, organic sales were up 0.5% YoY. Fiscal 2019 Q3 net income came in at $261.4 million or $2.20 per share, compared to $198.6 million or $1.58 per share in the year-ago period. Adjusted EPS was $2.40, up 11% YoY compared to $2.16 in the year-ago period. The company updated its fiscal 2019 adjusted EPS guidance range to $8.50 to $8.70 from $8.85 to $9.15 earlier.

Operating margin was 23.8% compared to 22.5% a year ago, impacted by lower incentive compensation expense. The company witnessed strong growth in longer-cycle end markets and weak growth in shorter-cycle end markets. Longer-cycle end markets include oil and gas, pulp and paper, mining, and life sciences, which grew in double digits. Shorter-cycle end markets include automotive, semiconductor, and food and beverage, which witnessed declines.

End market cyclicality always impacts industrial automation companies, there is nothing new in it. Further, in a challenging macro environment 2% revenue decline is not a big disappointment. What is encouraging is that, according to a report, the industrial control and factory automation market is expected to reach USD 269.5 billion by 2024 from USD 160.0 billion in 2018, at a CAGR of 9.08%. Industrial Internet of Things or IIoT is driving growth in this market. In IIoT, use of smart sensors and actuators drive manufacturing output.

Rockwells peer group includes ABB Ltd, Cognex Corporation and Honeywell International. Rockwells GAAP forward PE ratio is 20.98x, compared to ABBs 29.03x, Cognexs 55.94x and Honeywells 20.15x. Rockwells trailing 12-month price to sales ratio is 2.94x, compared to ABBs 1.38x, Cognexs 10.48x and Honeywells 3.09x. Rockwells trailing 12-month price to cash flow ratio is 17.95x, compared to ABBs 18.15x, Cognexs 30.70x and Honeywells 18.77x.

Compared to its peers, Rockwell is attractively valued around the current price. However, the company has a not so strong balance sheet. Its cash on balance sheet is $913.4 million and total debt is $2.24 billion. Net debt is $1326.6 million. The company isnt cash-rich, and it is funding its growth activities partially through debt. However, its net leverage is 0.88x, which means its debt-load isnt alarming. Moreover, the company has generated $1.07 billion of net operating cash flow, and $591.64 million of free cash flow in the past twelve months, which are encouraging.

The companys mission is to establish the connected enterprise with the help of smart manufacturing, leveraging the power of smart sensors and analytics. The company will help its customers convert their enterprise to a connected enterprise where IIoT will play a major role. This will create demand for many of the companys products. In addition, the companys motion control products will see rising demand since they are basically robotics products and robotics is a high growth sector. Compared to these demand drivers, Rockwells debt problem isn't a serious issue.

In the last four years Rockwells revenue growth remained flat. I expect the growth drivers mentioned above will drive its revenue growth at a CAGR of mid-single digit, say 5%, in the next four years. Its trailing 12-month revenue is $6694.1 million. At a CAGR of 5%, its 2023 revenue will be $8545 million or $73.03 per share. At todays price to sales ratio is 2.94x, the stocks 2023 price will be $214.71.

A large percentage of Rockwells sales in the U.S. and Canada are achieved by distributors. In other countries also, a high portion of its sales are achieved by a limited number of distributors. Disruptions to the companys distribution channels could adversely affect revenue growth.

The ability of the company to correctly identify the changes in demand patterns of the customers results in revenue growth. If the company fails to identify changes in customers demand patterns, revenue growth will be adversely affected. In addition, if the company fails to anticipate broader industry trends, demand for its products could decrease.

Many of Rockwells products are products of the future, such as the iTRAK intelligent track system and the connected smart products. Although the companys revenue growth remained flat in the past four years, in the next four years its revenue is expected to grow in mid-single digit driven by demand for such products. Long-term growth-oriented investors can buy the stock around the current price.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Rockwell Automation: A Slow But Steady Growth Story - Seeking Alpha