Rockwell Automation Inc. (ROK, Financial) is doing very well, and the markets are noticing.
Not only do its industrial automation and digital transformation businesses have huge growth prospects, but the company has shown strong year-over-year growth with positive earnings reports. The growth of Rockwell's revenue is also showing continuous progress, with decent organic growth in fiscal 2022 and the first quarter of 2023. Moreover, after facing tough macroeconomic challenges last year, the company has provided strong earnings per share and sales growth guidance.
There are also a few external factors pushing the stock up. For one thing, the Federal Reserve is easing up on its aggressive policy-tightening initiatives. This has helped the market stabilize somewhat.
In addition, the $280 billion CHIPS and Science Act and Inflation Reduction Act of 2022 are set to boost companies like Rockwell in the future.
Under these circumstances, the stock has proven to be a winner and is currently up nearly 20% over the last six months. However, when compared it to most of its peers, shares are trading at an expensive valuation.
Secular tailwinds provide a solid foundation for future growth
A leading provider of industrial automation products, the company sells its engineering, design and production software to more than 100 countries, serving a broad range of industries like automotive, semiconductor, oil and gas, life sciences, logistics and beverage.
Rockwell's business lines are divided into three areas: Intelligent Devices, Software & Control and Lifecycle Services.
With rising inflation and interest rates, Covid-19 supply chain disruptions could inhibit its future success. However, industry trends suggest Rockwell will succeed due to its adaptability and consistent growth trajectory.
For Rockwell Automation, the biggest plus is that it operates in growing segments. According to data from Grand View Research, the industrial automation market is predicted to grow at a compound annual rate of 10.5% between 2023 and 2030. Similarly, the digital transformation market is expected to expand at a CAGR of 26.7% over the same period.
Apart from its regular business lines, Rockwell also offers its services to electric vehicle companies, a segment predicted to dominate 54% of the automotive industry by 2040, according to Bloomberg.
Such strong industry tailwinds have translated into a consistent growth pattern for the company. For the last three quarters, Rockwell has topped earnings predictions, underlining its strong performance.
On Jan. 26, Rockwell reported non-GAAP earnings per share of $2.46 for the fiscal first quarter of 2023, up 15% year over year, which beat estimates by 59 cents. The diluted net income was recorded at $3.31 per share. According to management, the increase in diluted earnings was due to fair value adjustments recognized in the previous and the current year related to its investment in PTC Inc. (PTC, Financial), a computer software and services company.
Additionally, revenue surged 6.66% year over year to $1.98 billion, with organic sales growing 9.9%. The majority of the company's revenue is generated from its Intelligent Devices business. The market remains bullish about the area as Gartner predicts a 17.5% year-over-year increase in robotic process automation software end-user spending in 2023.
Due to inflation and rising interest rates, Rockwell reported a year-over-year decline in its fiscal year 2022 results, with diluted earnings per share reported at $7.97 compared to $11.58 in 2021. Nevertheless, management expects a comeback and guided for 2023 diluted earnings per share of $10.99 to $11.79, up from prior guidance of $9.54 to $10.34. Furthermore, the company increased its reported sales growth guidance to 10% to 14% from 7.5% to 11.5% and organic sales growth to 11% to 15% from 9% to 13%.
Strong dividend payer in the tech sector
Rockwell is benefiting from its strong execution and good profitability. Its visibility is also at an all-time high as it holds a significant market share in its industry. However, one thing that sets it apart, especially in the tech space, is its consistent dividend history.
The company has increased its dividend for 13 consecutive years. At the end of the fiscal 2022, the company announced a 5% increase in its dividend to $1.18 from $1.12. At the time of writing, Rockwell's dividend yield is 1.63%.
In addition, Rockwell currently has an ongoing share repurchase program with $1.1 billion remaining as of Dec. 31.
Several prominent names in the tech space, such as Advanced Micro Devices (AMD, Financial), Salesforce (CRM, Financial) and eBay (EBAY, Financial), do not pay dividends. Many of these companies are growing rapidly and have decided to invest in their operations. However, Rockwell is unique because it chose to use its cash pile to reward investors. For income investors, it makes Rockwell even more attractive.
Valuation
Rockwell has been successful thanks to its strong brand recognition, portfolio of patents and trademarks, network effects and well-established distribution network. It also enjoys key partnerships with major companies.
Due to the runup in the stock, however, it is fair to say shares are slightly overvalued. As of this writing, its price-earnings ratio stands almost 35, which does not compare favorably with its two major competitors, Honeywell International (HON, Financial) and ABB (ABB, Financial). These tech giants are trading for price-earnings multiples of almost 28 times and 26 times.
Yes, the company benefits from secular tailwinds, but that does not mean it comes without risks. It is important to consider the foreign exchange risk since over 40% of Rockwell's revenue is generated outside the U.S.
In addition, if the Fed goes into a hawkish mode once again, it could substantially dent the overall economy. However, sectors such as industrials will be the most affected.
Takeaway
Rockwell has a strong and stable business model and a vast portfolio. On top of that, the company has decent shareholder returns and an active share repurchase program. The company faced challenges in 2022, yet the latest earnings report shines a positive light on its future.
It is not a company that investors can ignore as its business model benefits from several long-term growth catalysts that will power it well past the decade's end. However, the valuation is a bit frothy at the moment on the back of its success and general market enthusiasm. Hence, it might be best to wait for a drop in the share price.
