Please ensure Javascript is enabled for purposes of website accessibility

This Industrial Stock Is Up 50% in a Year, but Can Its Run Continue?

By Lee Samaha - Oct 30, 2017 at 8:04AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Rockwell Automation stock's strong run can continue provided the company can perform in these three areas.

Rockwell Automation (ROK 1.96%) is well known as a backdoor way to play growth in the industrial internet of things (IIOT). However, its 50% stock-price surge in the past year is probably more a matter of having its string of earnings upgrades come largely from improving capital spending trends in industrial automation.

The company heads into its fourth-quarter earnings on Nov. 8 with a lot of momentum, but given its high valuation on a current and forward basis, management probably needs to demonstrate its strong run can continue. In this context, let's look at the three things to focus on in the results presentations.

ROK PE Ratio (TTM) Chart

ROK PE Ratio (TTM) data by YCharts

Rockwell's improvements in its end markets have led to margin expansion alongside better free cash flow conversion. Here's a look at full-year 2017 guidance for context.






Organic sales growth

0% to 4%

1% to 5%

4.5% to 7.5%


Segment margin





Adjusted EPS





FCF as a % of adjusted income





Data source: Rockwell Automation presentations.

Simply put, the key to Rockwell's prospects is sales growth, so let's focus on three areas of its sales performance.


The country's better-than-expected GDP growth has helped growth prospects for a wide range of industrial companies in 2017, and Rockwell is no different. In fact, a look at its organic growth by region shows just how strongly the Asia-Pacific region has grown. In addition, U.S. growth has markedly improved in line with the recovery in U.S. industrial production this year. I'll discuss Europe in more detail in a moment.

A bar chart showing Rockwell organic sales growth by region.

Data source: Rockwell Automation presentations.

Although the Asia-Pacific region has contributed less than 14% of revenue so far this year,  it's contributed more than a third of total sales growth, with the U.S., accounting for 55% of total revenue, being the other big contributor, with 45% of growth.

In short, investors should keep a close eye on Rockwell's sales figures in China and the Asia-Pacific region, because any kind of GDP slowdown could hurt Rockwell's growth prospects.

A collection of rockwell automation products

Image source: Rockwell Automation

Growth in Europe

Organic sales growth in Europe, the Middle East, and Africa (EMEA) was slightly negative in the third quarter, and management's commentary on what happened raises as many questions as answers. On the earnings call, CEO Blake Moret talked of how "the timing of projects is driving some quarter-to-quarter variability." When quizzed further, he referred to "customer-specific" variability, with its traditional customers purchasing "a little bit less." CFO Patrick Goris claimed the growth in EMEA "came in as we expected" and reiterated the argument that it was due to project variability.

While management's reassurances sound good, Rockwell will have to deliver in the fourth quarter in Europe. It's a particular concern, because Rockwell competes fiercely in industrial automation with German company Siemens AG (SIEGY -3.69%), bearing in mind Rockwell's discontinuation of its traditional programmable logic controller (PLC), the PLC-5, in favor of migrating customers onto its newer ControlLogix PLC.

Essentially, the PLC controls manufacturing processes and assembly lines, so it's an integral part of Rockwell's offerings. Whenever a company discontinues an existing product, there's the possibility of some sales disruption, and it's possible that Siemens is gaining ground on Rockwell in Europe.


Rockwell's third-quarter earnings were boosted by strong growth in transportation, with automotive-related sales up a whopping 20%. The question is whether it can continue with global automotive production growth starting to slow, particularly in the United States.

On the third-quarter earnings call, Moret admitted that "over time," reduced automotive sales would affect Rockwell,  but he also discussed the possibility that Rockwell could still do well given its exposure to spending on IIOT solutions and from a favorable customer mix.

It's far from clear what the impact of a slowing auto industry will have on industrial companies with significant exposure, but recall that merely a slowing of Rockwell's growth rate could pressure the stock.

Looking ahead

Rockwell's stock has been on a fantastic run in 2017, but the focus now shifts to organic sales guidance for its financial 2018, and how the company exits the fourth quarter is obviously the key to its prospects. Management will need to demonstrate that it can grow sales at a similar clip to this year's 6% organic growth target in the face of a slowing auto market and the possibility of slower growth in China. Meanwhile, competition with Siemens, particularly in Europe, needs to be watched closely.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Rockwell Automation Inc. Stock Quote
Rockwell Automation Inc.
$201.03 (1.96%) $3.85
Siemens Aktiengesellschaft Stock Quote
Siemens Aktiengesellschaft
$51.04 (-3.69%) $-1.96

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.