On Jun 26, we maintained our Neutral recommendation on leading
global provider of industrial automation power, control, and
Rockwell Automation Inc.
). Our reiteration was on the basis of expected benefits from
investment in Logix, recent acquisition of China-based medium
voltage drives business, restructuring activities and a strong
operating margin performance, offset by concerns regarding the
uncertain global economic scenario, further deterioration in the
Chinese economy and margin headwinds in the form of increased
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Rockwell Automation reported EPS of $1.33 in the second quarter
of fiscal 2013, up 11% year over year and ahead of the Zacks
Consensus Estimate. Sales dipped 2% to $1.53 billion in the
quarter, short of the Zacks Consensus Estimate.
Despite decline in revenues, margins were strong in the second
quarter. Total segment operating margin was 18.7% as strong
productivity, favorable mix and lower variable compensation
expense offset the impact of lower sales. The productivity result
was a combination of restructuring savings that the company has
not yet redeployed due to sluggish market conditions. Management
expects margin for the full year to be around 18.9%, up from its
previous guidance of 18.7%, aided by restructuring benefits and
strong operating performance momentum.
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. The ever-expanding
customer base in the Asia-Pacific region has resulted in higher
demand for efficient medium voltage drives. Given the higher
demand for Rockwell's medium voltage drives, the business is
Logix is the technology foundation that enabled Rockwell
Automation to become an industry leader for batch process
applications and attain a competitive edge over traditional
Distributed Control Systems (DCS) providers for continuous
process applications. Even though Logix sales were flat year over
year in the second quarter, it is expected to rebound and grow in
the mid single digits in the second half of fiscal 2013. Rockwell
Automation has plans to invest in Logix and expand the served
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. Rockwell Automation's performance in Asia
Pacific (12% of sales) continued to be weak in the second quarter
with organic sales dropping 16%, worse than first quarter's
decline of 9%. The company expects its China sales to decline
slightly for the full year; a downward revision from the previous
expectation of 5% annual growth.
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.
Other Stocks to Consider
Rockwell Automation currently retains a Zacks Rank #3 (Hold).
Other stocks in the industrial products sector with favorable
Zacks ranks are
), with a Zacks Rank # 1 (Strong Buy) and
Broadwind Energy, Inc
Plug Power Inc.
), both carrying a Zacks Rank #2 (Buy).