It’s Time To Lighten Up On Rockwell Automation (NYSE:ROK)

A Great Company But Rockwell Automation Is No Value

The stock market has entered a great rotation from growth to value and in that light, Rockwell Automation (NYSE:ROK) is a sell. Trading between 25X and 30X forward earnings it’s highly valued relative to the broad market making it a target for selling at the very least. And that’s a good thing because it means we may be able to get these shares at a cheaper price and believe me, we want to buy into this company. Rockwell Automation is fundamental to the global switch to automation and poised for accelerating growth over the next two years.

Rockwell Automation Had A Great 3rd Quarter

Rockwell Automation reported its calendar 3rd/fiscal 4th quarter results and beat the consensus for virtually all metrics. The only downside is that on a YOY basis revenue and earnings are down but that is mitigated by many factors. The first is that revenue grew 10% on a sequential basis and appears to be accelerating into the first quarter of fiscal 2021. The net revenue of $1.57 billion beat the consensus by 0.60% and is compounded by better-than-expected guidance for F2021.

On an organic basis, revenue fell -12% YOY due to weakness in Oil&Gas (-35%) and automobiles (-25%). That was offset by a low single-digit acquisitional gain and the acquisitions themselves are said to be producing their own organic growth as well. Areas of strength include Drive and Motion, Information Technology, and semiconductors which all saw robust growth. Drive and Motion outperformed all other segments with high double-digit growth. It is followed by more-modest double-digit growth in infotech and high single-digit growth in semiconductor solutions.

Moving down to the bottom line, margins held flat over the past year and drove better than expected earnings. The GAAP earnings of $2.25 beat by $0.55 while adjusted EPS of $1.87 beat by a smaller $0.12.

Rockwell Automation was able to provide guidance and in a range well above the current consensus. The company is looking for organic revenue growth in the range of 5.0% driven by a double-digit increase in recurring revenue. For the bottom line, the company is expecting EPS in the range of $8.45 to $8.85 implying 10% EPS growth over the coming year.

Rockwell Automation Pays A Safely Growing Dividend

Rockwell Automation pays a safely growing dividend but one with only an average 1.75% yield. The upshot is that yield will increase should prices continue to fall but even if they don’t, dividend growth is in the forecast. The company has been increasing for 11 years and just delivered an increase with the latest distribution. The payout ratio is about 50% of earnings, less compared to 2022 consensus, and backed up by a large cash position, great coverage, and low leverage relative to its free cash flow.

The Technical Outlook: A Developing Weakness In Rockwell Automation

I’m not typically bearish on stocks and I am not recommending this stock as a short but there is a developing weakness to be aware of. Not only has price action confirmed resistance and a possible top at the $260 level but the indicators are also showing major divergences. Divergences don’t always play out as bearish as they look but this one is looking pretty bearish. The caveat is that support is still present at the short-term moving average and $240 level. At best, I think investors can expect to see shares of ROK trend sideways within their new range of $240 to $260. At worst, support will continue to break down and open the door to $220 and possibly $200. Longer-term, automation stocks are a buy when the value presents itself.

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