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Does This Hot Stock’s Run Have Room to Run? | The Motley Fool

Rockwell Automation (NYSE:ROK) is on a roll. The latest third-quarter earnings were ahead of expectations, and management upgraded earnings guidance for the third time this year. Moreover, there’s reason to believe there could be more upside potential this year. Here’s why the best is yet to come for Rockwell in 2021.

Rockwell upgrades guidance, again

The automation company’s fortunes are tied to spending trends in the industrial sector at large. As such, Rockwell is a typical cyclical stock. As the economy improves and customers free up spending budgets, Rockwell’s orders and sales start to improve.

That’s exactly what’s happened with the industrial company in 2021. As you can see below, the company has raised its full-year sales and earnings guidance as the year has progressed. It’s something that investors need to keep an eye on. Rockwell’s current full-year organic sales guidance of 8% is well above the 3.5% to 6.5% forecast back in November.

Metric for Management Guidance

July 2021

April 2021

January 2021

November 2020

Organic revenue growth

8%

5.5% to 8.5%

4.5% to 7.5%

3.5% to 6.5%

Adjusted EPS

$9.10 to $9.30

$8.95 to $9.35

$8.70 to $9.10

$8.45 to $8.85

Data source: Rockwell Automation presentations. EPS = earnings per share.

It’s been a great run, and the stock is up 25% in 2021 alone, but can it continue? I happen to think it can, and here are five reasons why.

1. Momentum remains strong

Rockwell’s automation markets are split into discrete automation (factory and machine control), process automation (transforming raw materials into a product), and hybrid (continuous processing). The improvement in the economy has led to significant improvement (see the next table below) in the full-year fiscal 2021 outlook for discrete and hybrid automation.

2. Process automation spending

Still, the good news is there’s still room to run with Rockwell’s process automation end markets. In a nutshell, the crash in the economy in 2020 caused mining and energy companies to look for ways to cut spending. Given that they tend to be long-cycle industries, it takes time for budgets to be changed. However, with commodity prices surging, commodity companies will likely increase investment at some point. 

CEO Blake Moret was asked about the matter during the earnings call and he commented that there are some early signs of improvement. He said that positive commentary from “earlier cycle oil and gas operators, the people who are providing drilling technology as well as oilfield services” encouraged him to believe Rockwell was in a “good spot” to benefit down the line.

Rockwell Automation End Market

July Guidance

April Guidance

January Guidance

November Guidance

Notes

Discrete

Up 15%

Up 15%

Up 10%

Up mid-single digits

Automotive guidance is steady at 10% growth, significant ramping in semiconductor growth guidance up to high teens.

Hybrid

Up 15%

Up 10%

Up high-single digits

Up mid-single digits

Steady improvement in food & beverage, life sciences, and tire guidance.

Process

Down low-single digits

Down mid-single digits

Flat

Up low-single digits

Chemicals outlook improved and mining/aggregates/cement outlook has been stable, oil and gas outlook has worsened from flat in November to down mid-teens in July.

Data source: Rockwell Automation presentations. Author’s notes.

3. Electric vehicles

Another area where Rockwell could see more improvement is with automotive, and specifically electric vehicles (EV). Moret outlined that two-thirds of the automotive projects he is seeing “have EV content.” That’s a plus because Moret believes Rockwell benefits more from EV production than internal combustion engine production due to demand for precision motion control.

4. Orders remain high

Investors can also feel optimistic because Rockwell’s orders continue to run at a high level. For example, the company reported orders of over $2 billion in the third quarter. That’s a figure significantly above the $1.85 billion reported in sales, so Rockwell’s orders are growing more than its current sales. If that trend continues then investors can expect to continue to be strong in fiscal 2022.

Although Moret wasn’t drawn on giving fiscal 2022 guidance during the recent earnings call, he promised an update in the investor meeting due in November.

Eight beer bottles on a production line in a factory.

Image source: Getty Images.

5. Long-term growth prospects

The pandemic has increased awareness of the need for automation in the workplace, and the ongoing trend toward digitization continues. Rockwell stands well placed to benefit from both. Also, management continues to make investments to further it. For example, the partnership with PTC adds PTC’s Internet of Things and augmented reality solutions to Rockwell’s automation solutions. 

In addition, there’s the recently announced acquisition of cloud-based smart manufacturing platform Plex Systems for $2.2 billion. The deal is complementary to PTC’s industrial software solutions and allows Rockwell to further expand in the market for digitization.

Looking ahead

All told, Rockwell Automation has plenty of near- and long-term opportunities ahead of it, and investors should look out for more positive news in the months to come. And notably at the investor day meeting in November.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.



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