Balanced Risk-Reward for Rockwell Automation - Analyst Blog

On Apr 1, 2014, we issued an updated research report on Rockwell Automation, Inc. ROK. This provider of automation equipment is expected to benefit from expansion in emerging markets, acquisitions and strong balance sheet position.

Rockwell Automation started its fiscal 2014 year with healthy top-line growth and strong earnings conversion in its first-quarter fiscal 2014 results. The company reported a 20% year-over-year improvement in its adjusted earnings per share to $1.47. The results also beat the Zacks Consensus Estimate of $1.39 per share. Total revenue was $1,591.7 million in the quarter, up 7% year over year. Organic sales also grew 7% year over year.

During the reported quarter, Rockwell Automation repurchased 1.0 million shares for $110.7 million. With a manageable debt-to-capitalization ratio of 25% and cash position of $1.2 billion as of Dec 31, 2013, the company can reinvest in growth opportunities, pursue mergers and acquisitions and return cash to shareholders.

Rockwell raised its organic revenue growth in the range of 3%–6% for fiscal 2014 from the previous band of 2%–6%. The company also revised its adjusted earnings per share to the range of $6.00–$6.35 for the full year from $5.95–$6.35. The company expects sales to be around $6.6 billion.

Notably, in Oct 2013, Rockwell Automation entered into an agreement to purchase vMonitor. This will help the company in various wireless solutions, primarily for monitoring and controlling wellhead and upstream oil and gas applications. Additionally, in Nov 2013, Rockwell Automation acquired Jacobs Automation, which will add intellectual capital and unique technology to its resources.

Despite these positives, the company's increased spending to support growth will continue to pressure margins in the near term. Rockwell Automation needs to continually develop advanced technologies for new products and product enhancements to counter competition. Developing new products requires high levels of innovation and the development process is often lengthy and costly.

Soft economic growth, lack of credit availability and project delays in China will hurt the company as well. Moreover, intense competition and uncertainty in the global economy remain headwinds in the near term.

Currently, Rockwell Automation carries a Zacks Rank #3 (Hold).

Key Picks from the Sector

Some better-ranked stocks worth considering at the moment include Kadant Inc. KAI, Illinois Tool Works Inc. ITW and Middleby Corp. MIDD. All of these sport a Zacks Rank #1 (Strong Buy).