Rockwell Automation (ROK) To Grow On Manufacturing Strength

On May 18, we issued an updated research report on Rockwell Automation Inc. (NYSE:ROK) . The company is poised to gain from favorable manufacturing environment, strength in heavy industries, positive impact of the tax reform, as well as increased investment. However, headwinds in transportation vertical are expected to mar its performance in the near future.

Let’s illustrate the factors in detail.

Rockwell Automation to Grow on Favorable Manufacturing Environment

Rockwell Automation raised the fiscal 2018 adjusted EPS guidance to $7.70-$8.00, mainly backed by favorable global manufacturing environment and positive macroeconomic indicators. Notably, global industrial capital spending is on the rise and is anticipated to continue to be a tailwind in fiscal 2018.

PMI (Purchasing Managers' Index) remained above 50 so far this year, indicating a continued expansion in the U.S. manufacturing economy. Further, Architecture Billings Index (ABI) also remained above 50 in March 2018, which reflects improving business conditions.

Growth in Heavy Industries Remains a Catalyst

Consistent with its guidance provided in January 2018, Rockwell Automation expects that heavy industries will be the largest growth driver, followed by consumer vertical. Heavy industries performed well in second-quarter fiscal 2018, led by growth in oil and gas, mining, metals and semiconductor. Moreover, lower tax rates would translate into improved earnings for the company and provide it with greater flexibility to deploy cash. Furthermore, improvement in emerging markets and growth of the middle class will create demand for semiconductor and other heavy industries.

U.S. Tax Reform to Aid Earnings

Rockwell Automation remains optimistic about the impact of the tax reform on customers' investment decisions, which could benefit its future performance. The company believes adjusted effective tax rate for fiscal 2018 will now be closer to 20.5%, lower than guidance provided in January. This will also drive its earnings performance.

Increased Investment to Drive Growth

To boost growth and other long-term objectives, Rockwell Automation will increase investments in fiscal 2018. These efforts include accelerated software development and commercial resources to fuel growth of its Information Solutions and Connective Services offering. Further, Rockwell Automation accelerated investments to expand Process capabilities in order to accelerate growth.

Headwinds in Transportation Vertical Remain Concerns

In the fiscal second quarter, the Transportation vertical delivered a weaker-than-expected performance due to tough year-over-year comparison. Rockwell Automation expects that its Transportation sector will be flat to down in fiscal 2018. Even though new program commitments for electric vehicles hold promise, management remains uncertain regarding the timing of the capital spending as automotive manufacturers may be deferring MRO spending until the company finalizes plans for accelerated investment for the electric vehicle market.

Share Price Performance

Rockwell Automation has outperformed its industry with respect to price performance in a year’s time. The stock has gained around 15%, while the industry has recorded growth of 10%, during the same time frame.

Zacks Rank & Stocks to Consider

Rockwell Automation currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the same sector are Axon Enterprise, Inc (NASDAQ:AAXN) , Caterpillar Inc. (NYSE:CAT) and Terex Corporation (NYSE:TEX) . All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Axon Enterprise has a long-term earnings growth rate of 25%. Its shares have appreciated 134%, over the past year.

Caterpillar has a long-term earnings growth rate of 13.3%. The company’s shares have been up 52% in the past year.

Terex has a long-term earnings growth rate of 20.2%. The stock has gained 26% in a year’s time.

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