Rocked by Concerns, Rockwell Automation in for a Weak FY16

On Nov 18, 2015, we issued an updated research report on Rockwell Automation, Inc. ROK. The provider of industrial automation power, control and information solutions will be hurt by slowdown in the U.S markets, lower oil prices, and unfavorable foreign currency. Moreover, weakness in mining and stiff competition remain matters of concern.

Rockwell Automation reported adjusted earnings per share of $1.57 in fourth-quarter fiscal 2015, down 16% from $1.86 earned in the prior-year quarter. Sales dipped 9.8% to $1.608 billion in the quarter, the first quarter of fiscal 2015 in which the company witnessed an organic sales decline due to lower sales in the product businesses, especially in the U.S, its largest market. This was mainly because Rockwell Automation's customers have become more cautious with capital expenditures and operating spending.

Demand through the fourth quarter and September was especially weak, down 10% year over year. Demand levels in October and early November were down at the same levels. Hence, the company expects organic sales in the first quarter of fiscal 2016 to be down in the mid-single digit year over year due to high-single digit dip in the U.S. Rockwell Automation cautions that sequential growth in the balance of 2016 will not be sufficient to drive positive organic growth for the year.

The fourth quarter also faced the largest negative impact from currency (8%) than any other quarter in fiscal 2015. At current exchange rates, Rockwell Automation expects currency headwinds in first-quarter fiscal 2016 similar to that of fourth-quarter fiscal 2015. For the full year, the company expects adverse currency impact to reduce sales by 300 basis points.

Rockwell Automation initiated fiscal 2016 adjusted earnings per share guidance of $5.90 to $6.40 on the back of revenues of $6.0 billion. Compared to adjusted earnings per share of $6.40 earned in fiscal 2015, this reflects year-over-year decline of 8% to flat results.

Persistent decline in oil and gas will continue to weigh on Rockwell Automation's performance, given its exposure of roughly 12% to oil and gas. The company noted that China remains slow as capital spending is still very constrained. The global mining industry has been noticeably sluggish due to oversupply and weak commodity prices, particularly in China and Australia.

The Zacks Consensus Estimate for fiscal 2016 decreased 8% to $6.09 per share while for fiscal 2017 it decreased 8% to $6.62 per share. Rockwell Automation carries a Zacks Rank #5 (Strong Sell).

Other Stocks That Warrant a Look

Some better-ranked stocks in the same industry are iRobot Corporation IRBT, CUI Global, Inc. CUI and Advanced Emissions Solutions, Inc. ADES. All these stocks carry a Zacks Rank #2 (Buy).

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