On Mar 21, we maintained our Neutral recommendation on leading
global provider of industrial automation power, control, and
Rockwell Automation Inc.
), 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.
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
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.
Franklin Electric Co., Inc.
Chicago Bridge & Iron
), which carry a Zacks Rank #2 (Buy).
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