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Why Rockwell Automation Slumped 17.6% in May

By Lee Samaha – Updated Jun 7, 2019 at 8:22AM

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The industrial automation play faces some near-term earnings headwinds.

What happened

Shares of Rockwell Automation (ROK 0.58%) declined 17.6% in May, according to data provided by S&P Global Market Intelligence. It's a disappointing performance but not entirely unexpected. After all, its customers' capital spending plans make up Rockwell's revenue, and if there's any sign of a slowdown in its customers' end markets, the first thing they will look to do is cut expansionary capital spending.

Unfortunately, in common with a slew of other industrial companies, the market has sold off Rockwell Automation on fears of a weakening in industrial production, exacerbated by ongoing trade tensions. Moreover, it didn't help that Rockwell cut its full-year organic sales growth guidance to a range of 3.7%-5.7% compared to a previous range of 3.7%-6.7%. 

A car production line.

Rockwell Automation is seeing weakness in its automotive end market. Image source: Getty Images.

The reason? CEO Blake Moret put it down to a weakening in the outlook for automotive capital spending. In fact, Moret has progressively lowered his full-year expectations for Rockwell's automotive-based sales growth in 2019. Having started the year predicting a flat performance for its automotive-related sales, Moret lowered expectations to a mid-single-digit decline during the first-quarter earnings call, and then promptly lowered expectations to a 10% dip.

So what

With Rockwell's automotive outlook now on a more realistic footing, the question turns to whether it will spread to other industries or remain isolated in the automotive sector. In this regard, investors will be focused on heavy industries and oil and gas.

So far, it's been an area of strength for Rockwell in 2019. In fact, when asked which industries could lead the company to the high end of guidance this year, Moret replied, "continued strong growth in heavy industries through the year."

Given recent drops in the price of oil and fears of a cyclical slowdown causing commodity prices to fall, it's understandable if the market started expressing some doubts about Rockwell's prospects in its second half.

Now what

So far this year, automotive, consumer electronics, and China have been the main areas of weakness for industrial companies, and it's hard to tell whether this is something that will spread to the wider economy or remain simply a soft patch in an economy that continues to grow.

Rockwell is certainly facing some near-term pressure, but the underlying long-term prospects for the company's automation and Industrial Internet of Things (IIoT) solutions remain positive. That's something to consider before selling the stock. 

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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