Rockwell Automation (ROK) Stock Up On Emerson's Raised Offer

Shares of Rockwell Automation Inc. (NYSE:ROK) were up 2.59% to close at $193.61 on Nov 16 as rival Emerson Electric Co. (NYSE:EMR) sweetened its offer to acquire the former at $225 per share. This translated the total value of the deal to $29 billion. Notably, this is Emerson’s third attempt to acquire the automation products manufacturer.

The consideration would be paid in $135 per share in cash and $90 per share in Emerson shares. Per Rockwell Automation, it would review the unsolicited proposal with its financial and legal advisers to determine the course of action that will be in the best interest of the company and its shareholders.

On Oct 31, the company had announced the rejection of Emerson Electric’s takeover bid valued at around $28 billion. This led to the stock hitting a 52-week high of $210.72 as the decision impressed the market and analysts. In fact, the company’s share price has outperformed the industry as well as the S&P 500 year to date. While the stock has been up 44.1% the industry grew 41.1%, and the S&P 500 gained 16.9%.

Meanwhile, shares of Emerson Electric have rallied 5.8%, underperforming its industry’s growth of 11.3% and the S&P 500’s gain of 14.8%.

A Dogged Suitor

On Oct 10, Emerson Electric had offered Rockwell Automation $107.50 per share in cash and 225 million shares of its common stock. The stock was valued at $107.50 per share based on Emerson Electric's 30-day volume weighted average share price of $62.92 as of Oct 10, 2017.

Markedly, this was Emerson Electric’s second attempt to acquire Rockwell Automation. On Aug 2, 2017, Rockwell Automation had refused Emerson Electric’s proposal to acquire it for $200 per share, with approximately half of the consideration in cash and the other half in common stock.

Why Is Emerson Pursuing Rockwell Automation?

Earlier, Emerson Electric’s management had stated that they considered only small bolt-on acquisitions. However, from these proposals it is evident that the company is now trying to diversify businesses and reduce exposure to volatile energy prices.

Therefore, Emerson Electric sees Rockwell Automation as a way to get more exposure to the rapidly growing automation business. One of Rockwell Automation's advantages is its advancement in internet of things, which allows different devices and systems to communicate with each other over the internet.

Even though Emerson Electric has been trying to expand its software portfolio through acquisitions, it clearly lags Rockwell Automation's offerings that help industrial businesses connect their technology operations. While, Emerson has a market capitalization of $37.77 billion, Rockwell Automation has a market capitalization of $24.72 billion. The deal, if comes through would create a leader in the $200 billion global automation market, with best-in-class portfolio of automation solutions

Why Were the Previous Offers Shunned?

Following a review of the proposal and consultation with financial and legal advisors, Rockwell Automation’s board of directors had concluded that Emerson Electric's offer was not in the best interest of the company or its shareholders. Also, as per reports, Rockwell Automation had concerns about the large amount of Emerson Electric’s stock in the deal. Furthermore, it was apprehensive regarding Emerson Electric's poor track record of integrating acquisitions.

Is Rockwell Automation Better Off Alone?

Rockwell Automation targets long-term revenue growth of 6-8%, double-digit EPS growth, returns on invested capital (ROIC) of more than 20% over the long term and cash flow of around 100% of adjusted income. These goals are likely to be supported by the company’s strategy of diversifying sales streams by expanding products portfolio, solutions and services as well as global presence.

Additionally, it aims at achieving growth rates in excess of the automation market by expanding the company’s served market, strengthening competitive differentiation, and catering to a wider range of industries and applications.

Going forward, Rockwell Automation’s new Connected Enterprise (CE) integrated supply chain management system is anticipated to be a catalyst. Meanwhile, the company is increasing the number of industries, applications and geographies as well as improving investments to expand the value of CE. With average profitability well above the corporate average, CE sales are expected to be an integral part of Rockwell Automation’s incremental growth and boost margins over the next few years.

In the trailing four quarters, Rockwell Automation outpaced the Zacks Consensus Estimate and delivered a positive average earnings surprise of 9.1%. In fact, the company has been witnessing upward revisions in the last 30 days. Also, the Zacks Consensus Estimate moved up 1% to $7.39 for fiscal 2018 and 5% to $8.26 for fiscal 2019. A positive trend in estimate revisions reflects investor’s optimism on the company’s bright prospects.

Rockwell Automation currently has a ROA of 12.3% while the industry's ROA is 12%. An above-average ROA denotes that the company is generating earnings by effectively managing assets. Moreover, the company’s trailing 12-month ROE of 38.7% is higher than the industry’s ROE of 34.8%, reflecting the company’s tactical efficiency in using shareholders’ funds. In addition, Rockwell Automation’s long-term earnings growth rate of 11.8% is a positive.

Thus, substantiating the fact that Rockwell Automation is better placed on a stand-alone basis. It currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks to Consider

Some better-ranked stocks worth considering in the same sector are Caterpillar Inc. (NYSE:CAT) and Terex Corp. (NYSE:TEX) flaunting a Zacks Rank of 1.

Caterpillar has a long-term earnings growth rate of 9.5%. Its shares have rallied 47.7% in the past year.

Terex has a long-term earnings growth rate of 11.25%. Its shares have surged 54.2% in the past year.

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