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On Dec 13, we maintained our Neutral recommendation on Rockwell Automation Inc. (ROK - Analyst Report), a leading global provider of industrial automation power, control, and information solutions. Our reiteration was on the basis of expected benefits from investment in Logix as well as new customer offerings that will increase its served market and growth in the oil and gas markets. However, concerns regarding weakness in Europe and Asia Pacific might offset the positives.

Why Reiterated?
 
Rockwell Automation reported EPS of $1.62 in the fourth quarter of fiscal 2013, up 14% year over year and ahead of the Zacks Consensus Estimate. Sales increased 3% to $1.7 billion in the quarter, surpassing the Zacks Consensus Estimate.

Over the past decade, Rockwell Automation’s investments in technology and globalization has helped the company to consistently expand its market share to approximately $90 billion, up from $80 billion a year ago. 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.

Rockwell Automation has plans to invest in Logix and expand the served market. Industrial network infrastructure, security, remote automation and monitoring, active energy management, industrial intelligence, and business analytics represent Rockwell’s new customer offerings that will help increase its served market.

Oil and gas was Rockwell’s fastest growing vertical in fiscal 2013 as the company continues to see benefits from prior investments in the segment. Currently, oil and gas is Rockwell’s largest end market, accounting for more than 10% of the company’s total sales. It is likely to be the next big market for Rockwell Automation over the next three to five years. Since 2007, Rockwell has made five acquisitions to expand its Oil & Gas domain expertise. Global capital expenditure for the oil and gas market in FY2013 is projected at $678 billion, up 10% from FY2012, driven by steadily rising energy demand, increasing regulatory oversight and restrictions, and shifting energy resources and markets.

Rockwell Automation continues to target 6%-8% long-term sales growth. This goal includes 1%-2% growth from strategic acquisitions. Sales mix, operating leverage and internal productivity initiatives are expected to offset targeted growth investments. Rockwell Automation maintains its goal of delivering double-digit EPS growth and ROIC of more than 20% over the long term.
 
On the flipside, Rockwell Automation’s performance in Asia Pacific (13% of sales) continued to be weak in fiscal 2013, dropping 10% - the only region where growth contracted. Sales declined in all countries, except for Japan. India was very weak and China sales were down 5% for the year. Weakness in China was due to soft economic growth, lack of credit availability, and project delays.

Furthermore, given that the EMEA region contributes 21% to Rockwell Automation’s sales, we remain cautious due to Europe's persistent debt problems. Macroeconomic conditions might continue to be a headwind for Rockwell Automations in fiscal 2014. Moderating global economic growth and uncertainty in the global economic scenario can lead to cautious capital spending, limiting Rockwell’s near-term revenue visibility.

Other Stocks to Consider
 
Rockwell Automation currently retains a Zacks Rank #3 (Hold). Better-ranked stocks in the retail sector include Xylem Inc. (XYL - Analyst Report), DXP Enterprises, Inc. (DXPE - Snapshot Report) and Flowserve Corp. (FLS - Analyst Report). While Xylem carries a Zacks Rank #1 (Strong Buy), DXP and Flowserve hold a Zacks Rank #2 (Buy).
 

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