Buy This ‘Tech’ Stock. Automation Is the Future.
Tech stocks are all the rage—and that makes industrial stock Rockwell Automation ROK +1.61% a stock to buy now.
When investors think of industrials, they tend to imagine companies that make pipes, turbines, tractors, and backhoes. That isn’t Rockwell Automation (ticker: ROK). The Milwaukee-based company, which competes with the likes of Siemens (SIE.Germany) and ABB (ABBN.Switzerland), is a leader in the automation and digital transformation of manufacturing processes. Companies making everything from cars to cookies use Rockwell hardware and software to make their plants function.
Rockwell’s stock has had a great start to 2023—it has gained about 25% through Wednesday’s close—and there are probably more gains ahead. By providing the technology necessary to automate manufacturing, Rockwell is growing faster than it has in the past, and that growth should continue as supply chains continue to ease, industrial activity begins to recover, and the U.S. brings manufacturing back home. What’s more, the stock should earn a higher valuation as investors begin to consider it for what it really is—a tech company.
“[Trends] across automation and shoring, as well as the emergence of AI over time, could lead manufacturers to lean in and invest in smarter devices and software solutions,” writes Citigroup analyst Andrew Kaplowitz
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Continue reading. “We view Rockwell to be a key beneficiary.”
Some of that is already priced into the stock.
Rockwell shares trade at 25.5 times 12-month forward earnings of $12.59 a share, above their five-year average of 23.7 times.
That reflects the fact that Rockwell’s growth already has accelerated.
The company reported $8.1 billion in sales during 2022, up 12% from $7.2 billion in 2021, faster than its 5% or so average annual growth rate over the past five years.
That faster growth was spurred in part by the easing of supply chains following Covid-19.
The pandemic, remember, made semiconductors—part of almost every piece of hardware Rockwell makes—hard to come by.
With chips now more available, Rockwell reported blowout fiscal second-quarter earnings in April, while raising full-year financial guidance to a midpoint of $11.85 a share from a prior midpoint of $11.10. “[The improvement was] more a factor of chip supply starting to come in better and better,” says CEO Blake Moret.
More semiconductors, however, aren’t the only reason that sales will grow faster. Rockwell benefits from one of the biggest changes of the past few years—the reshoring of U.S. manufacturing.
When China joined the World Trade Organization in 2001, the U.S. accounted for about 25% of global manufacturing output, but today represents just 15%.
China accounts for 30%. The U.S. government, whether dominated by Republicans or Democrats, wants to change that, and spending roughly $2 trillion—the total amount coming from the Infrastructure Investment and Jobs Act, the Inflation Reduction Act, and the Creating Helpful Incentives to Produce Semiconductors and Science Act, or CHIPS Act—is a good start.
That headline number has started to turn into real economic activity. Ford Motor F +1.20% (F) announced a record $9.2 billion loan from the Energy Department to help it build electric-vehicle battery capacity in Kentucky and Tennessee, while Taiwan Semiconductor Manufacturing (TSM) announced another $20 billion investment in Arizona for a second fab for making cutting-edge microchips. All told, some $500 billion in new projects have been announced since 2020, according to Melius Research analyst Scott Davis. Only about half of those have been started, which means more spending is on the way.
That spending bodes well for coming results, even if U.S. manufacturing remains in a slump. After five consecutive monthly readings below the expansionary level of 50, the Institute for Supply Management’s manufacturing purchasing managers’ index of production turned higher in May, a sign that the worst of the downturn could be in the past. Even if a recovery isn’t a straight line up, Rockwell’s backlog of $5.6 billion at the end of the second quarter—up from roughly $4 billion a year earlier—should provide a buffer. “We’ve got such a large backlog that the lead times for a lot of our products are still out there a ways,” says CEO Moret.
But the biggest change in Rockwell’s business—the one that is most responsible for its rapidly rising sales growth—is the continued shift to automation with an artificial-intelligence kicker.
Software-related sales have grown to $2.4 billion, or about 30% of Rockwell’s total sales in calendar year 2022, up from 27% in 2020, and should hit about 32% of sales in 2025.
Software has better operating-profit margins, at almost 30%, than Rockwell’s overall 18.3%, which should help earnings grow at a roughly 10% clip, to $13.30, in 2024.
Historical valuations, however, don’t take into account the higher valuations that investors now place on
Apple AAPL +2.31% (AAPL) and Microsoft MSFT +1.64% (MSFT), which currently fetch about 29 times. In the past, they and Rockwell have traded at similar multiples, observes Citigroup’s Kaplowitz, who has a Buy rating on Rockwell shares. “As such, we do think that industrial tech could be relatively well positioned going forward,” he writes.
Morgan Stanley analyst Joshua Pokrzywinski’s most bullish case for the stock has earnings rising by 37%, to $15.37 a share, over the coming 12 months and its multiple improving to 27 times.
In such a scenario, Rockwell’s shares would be worth $415, up almost 30% from a recent $321.21.
It may not be automatic, but it seems reasonable for a stock with so many tailwinds at its back.