Rockwell Automation, Inc. (ROK - Free Report) is poised well to benefit from focus on cost cutting actions and synergies from acquisitions. Expansion of its portfolio of products, solutions and services will also drive growth. However, the slowdown in U.S manufacturing activity and weakness in oil & gas, automotive,and chemical markets remain headwinds in the near term.
The stock has long-term expected earnings per share growth rate of 6.3%. In the past year, the stock has gained 29.4%, compared with the industry’s growth of 15.1%.
The company, with a market capitalization of approximately $22.9 billion, currently carries a Zacks Rank #3 (Hold) and a VGM Score of B. Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 offer good investment opportunities. You can see the complete list of today's Zacks #1 Rank stocks here.
Let’s delve deeper into the factors that substantiate the company’s Zacks Rank #3.
Q2 Earnings Beat: Rockwell Automation reported adjusted earnings of $2.43 in second-quarter fiscal 2020 (ended Mar 31, 2020), beating the Zacks Consensus Estimate of 1.83. The bottom line improved 19% from $2.04 reported in the prior-year quarter, primarily on lower incentive compensation expense.
Positive Earnings Surprise History: Rockwell Automation has outpaced the Zacks Consensus Estimate in three of the trailing four quarters, while matching the same once. It has a trailing four-quarter positive earnings surprise of 10.57%, on average.
Return on Assets: Rockwell Automation currently has a Return on Assets (ROA) of nearly 16%, while the industry recorded ROA of 15%. An above-average ROA denotes that the company is generating earnings by effectively managing assets.
Growth Drivers in Place
Rockwell Automation has announced temporary cost containment measures in view of weak demand and uncertain market conditions on account of the COVID-19 pandemic. The company is taking preemptive actions to align its cost structure with this uncertain environment. The company is trying to minimize workforce reductions. There will be no incentive compensation payouts for fiscal 2020. It is cutting down discretionary spending across the organization, and is introducing other temporary cost actions that will be effective across its locations by the beginning of May. Rockwell Automation also announced salary cuts. These actions are expected to generate $150 million of savings in fiscal 2020.
Demand for packaged food and beverages are rising courtesy of travel restrictions imposed by governments around the world. Roughly 70% retail for grocery stores and home delivery and 30% foodservice for restaurants contribute to the Food & Beverage business. Further, the company is implementing freight surcharges to mitigate elevated supply-chain costs.
The company will also benefit from its focus on broadening the portfolio of hardware and software products, solutions and services. Further, significant investments to globalize manufacturing, product development and customer-facing resources will drive growth. The company is likely to witness above-market growth through a combination of share gains in core platforms, double-digit growth in Information Solutions and Connected Services segment, and contribution from acquisitions and inorganic investments.
However, there are a few factors that are likely to hinder growth in the near term.
The recent slowdown in U.S manufacturing activity remains a headwind as sales in the domestic markets account for roughly 54% of total sales. Further, weak oil and gas, automotive, and chemical markets remain concerns.
Stocks to Consider
Some better-ranked stocks in the Industrial Products sector are Silgan Holdings Inc. (SLGN - Free Report) , Axon Enterprise, Inc (AAXN - Free Report) and Broadwind Energy, Inc. (BWEN - Free Report) . While Silgan Holdings carries a Zacks Rank #1, Axon Enterprise and Broadwind Energy carry a Zacks Rank #2.
Silgan Holdings has an expected earnings growth rate of 11.3% for the current year. The stock has appreciated 12% in a year’s time.
Axon Enterprisehas a projected earnings growth rate of 14.2% for 2020. The company’s shares have rallied 14% over the past year.
Broadwind Energy has an estimated earnings growth rate of 174% for the ongoing year. The company’s shares have gained 21% in the past year.
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