Rockwell Automation (ROK +8.90%) is a leader in industrial automation, and helps its clients implement "smart" manufacturing processes by offering both hardware and software products for manufacturing companies in a wide range of industries. Over the past three years, the company has been integrating its enterprise software through the continued implementation of what it calls The Connected Enterprise, which connects the latest information technology with advanced industrial automation to lower costs at its manufacturing customers. Management commented in its FY 2019 annual report that "our customers face the challenge of remaining globally cost competitive and automation can help them achieve their productivity and sustainability objectives."
Simply put, the company is making its existing software platforms work together to improve the customer experience by integrating computers with production machines to streamline manufacturing so its customers can make their products at a lower cost. The ongoing initiative allows different computer systems to talk to each other, which makes more information available to more people involved in the manufacturing process, thereby increasing efficiency.
This should make its products more attractive, while protecting its existing market share in a highly competitive industry.
Rockwell believes manufacturing will change "more radically" in the next five years than it has in the past 20, due largely to the rapid integration of information technology and operations technology through the increased use of inexpensive smart devices and network technologies that are better able to work together.
The company reported in its Q1 report that roughly 60% of its sales come from manufacturing companies in the U.S. However, management noted in the filing that reported sales in emerging markets increased 8.8% year-over-year. So there are as yet untapped opportunities for the company.
A technology company closely tied to the manufacturing sector
Rockwell revenue has grown 14% over the past three years -- roughly the period since the initiative was implemented -- versus a decline of 7.4% over the previous three years. Such an involved process takes time, but positions the company to increase, or at least maintain, sales in a highly competitive business.
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Although Rockwell is a technology company, its business is more economically sensitive than many in the industry due to its reliance on manufacturing customers. While the contribution of manufacturing to the U.S. economy has declined over the years, it remains significant. The Institute of Supply Management in early April reported a reading of 49.1 in its manufacturing index in March -- a reading below 50 indicates a contraction in the sector -- with the new orders index declining 7.6% from February. The index had remained above 50 for the most part since the financial crisis, and much of the recent decline can be attributed to the spread of the novel coronavirus. The recent soft patch in global manufacturing data was particularly pronounced in Europe in 2019. The outlook remains soft for Europe and China in particular, with the uncertainty of the impacts of Brexit, and the ongoing trade dispute between China and the U.S.
The latest report on industrial production from the Federal Reserve showed capacity utilization across domestic industry at 77%, which remains below long-term averages. Historically, companies have been reluctant to add to capacity if utilization is below 80%. The changes being made through better use of data available through technology can help companies better identify needs for workers, plant, and equipment.
The increasing competition in global manufacturing makes innovation and further streamlining more important. Many companies may not be prepared for the challenges ahead, or even the current crisis, and their weaknesses will be exposed.
Rockwell will itself face additional headwinds due to the COVID-19 pandemic, due to its economic sensitivity, as the global economy stalls or falls into recession. However, global manufacturing will eventually rebound, and will be as competitive as ever (if not more so). Meanwhile, the company is attempting to operate as close to normal as possible given the situation.
On March 24, the company issued a statement saying in part that "because our operations are considered business critical industry infrastructure that is essential to health and safety, Rockwell Automation's manufacturing, distribution centers, service centers, [systems and solutions] centers, and engineering facilities in the U.S will remain open. We are working with governments around the world to ensure our critical operations can remain open globally."
Longer term, Rockwell is positioned to enhance the productivity of its manufacturing client base with its easy-to-use proprietary software. The company is also expanding its footprint through organic sales and acquisitions in overseas markets -- emerging markets in particular -- which should accelerate as the global economy is forced to reset due to both the pandemic and politics.
The recent decline in its share price has created a more attractive entry point. In addition, Rockwell has increased its cash dividend in each of the past five years, with an average increase of about 10%. Overall, it may not be as exciting as consumer-focused companies in the technology sector, but is worth a look.
