We maintain our Neutral recommendation on Rockwell Automation Inc. (ROK) given concerns regarding slow macroeconomic growth that overwhelms the company’s positives – strong global market presence, relentless focus on expanding in emerging markets, strong cash flow and a healthy balance sheet. The company retains a Zacks #3 Rank, which implies a Hold recommendation for the short term.
Rockwell Automation recently reported fiscal 2011 EPS of $4.80 versus $3.22 in fiscal 2010. Total revenue increased 24% to a record $6 billion. Both metrics outperformed the Zacks Consensus Estimates. For the fiscal 2012, Rockwell is looking at sales in the range of $6.2 billion to $6.5 billion, up 5-9% from 2011 results. The company provided its EPS guidance in the range of $5.05-$5.45 for fiscal 2012. The Zacks Consensus Estimate for the year stands at $5.30, above the midpoint of the company’s guided range.
We believe Rockwell Automation is well positioned for long-term growth based on its strong global market presence. The company is focused on further expanding its global footprint in emerging markets, as it expects automation growth rates in the emerging markets to be 50% higher than growth rates in developed countries. In fiscal 2011, emerging markets represented about 22% of total sales. The company has a long-term goal of deriving 30% of its total revenue from emerging markets. This is the key to meeting the company’s target of generating 60% of its revenue from outside the U.S. by 2013.
During fiscal 2011, Rockwell acquired Lektronix, a leading independent industrial automation repairs and service provider in Europe and Asia. This acquisition is expected to help Rockwell grow its business across Europe and further penetrate emerging markets. Prior to this, Rockwell acquired Johannesburg based Hiprom, a leading process control and automation systems integrator, during the first quarter of fiscal 2011. The acquisition enhanced Rockwell Automation’s business growth in the Sub-Saharan region, while broadening its presence in the global mining and mineral processing market.
In fiscal 2011, Rockwell Automation hiked its quarterly dividend by 21% to 42.5 cents. Rockwell Automation had hiked its dividend in June last year to 35 cents, another 21% increase, ending a drought of 16 consecutive quarters without a dividend hike. Since the big spin-off of its Rockwell Collins avionics and communications business into a separately traded, publicly held Rockwell Collins, Inc in 2001, Rockwell Automation has given its shareholders four raises and boosted its payout by 157%. We believe Rockwell’s solid balance sheet and cash flow characteristics support yet another dividend hike in 2012.
In fiscal 2011, Rockwell Automation repurchased a total of 4 million shares and at fiscal 2011 end, $202 million remained available under the $1 billion share repurchase authorization. A lower share count is expected to be a tailwind for earnings per share in fiscal 2012.
On the flipside, macroeconomic conditions might be a headwind to sales performance in fiscal 2012. Rockwell expects to see flat to low single-digit GDP growth in the mature markets, and somewhat lower growth than in fiscal year 2011 in the emerging markets. Moderating global economic growth and uncertainty in the global economic scenario can lead to cautious capital-spending in fiscal 2012, limiting Rockwell’s near-term revenue visibility.
Currency will prove to be another headwind for earnings in fiscal 2012. Further, the carryover impact of fiscal 2011 spending increases, continued investment in fiscal 2012 and a higher effective tax rate will also affect the fiscal earnings.
Based in Milwaukee, Wisconsin, Rockwell Automation Inc. is a global provider of industrial automation power, control, and information products and services. The company competes with ABB Ltd. (ABB), Emerson Electric Co. (EMR) and Siemens AG (SI).
To read this article on Zacks.com click here.
Zacks Investment Research
