There's no doubt that Rockwell Automation (ROK 1.30%) is a company in growth mode right now, but there's also no denying that its valuation isn't precisely in value territory. As such, there's a healthy debate on Wall Street as to where the growth stock is heading. Here's the lowdown.
Rockwell Automation
The range of price targets on Rockwell Automation stock is startling. At the time of this writing, Rockwell's share price is $289, whereas the range of Wall Street targets spans $220-$395. Moreover, there are analysts at some heavyweight firms involved at the ends of the range. For example, a Citibank analyst has a $381 target, compared to J.P. Morgan's $220 target. Meanwhile, Goldman Sachs has a $294 price target and a sell rating on the stock.
While it's never a good idea to get too caught up in analyst ratings and targets, the variance of opinion illustrates the talking points on the stock.
Image source: Getty Images.
The bulls' case
On the one hand, Rockwell just reported an excellent set of first-quarter fiscal 2022 earnings. It's no secret that the omicron variant exacerbated already-existing supply chain issues over the winter. Yet, Rockwell reported organic sales growth of 16.8% in its fiscal first quarter of 2022. Moreover, management maintained guidance for full-year organic sales growth of 16%-19% and maintained full-year adjusted earnings per share guidance of $10.50-$11.10.
It's a solid start to the year, and it's also broad-based. For example, management expects all three segments to grow organic sales by 15% in fiscal 2022.
It's helpful to dig into the sales guidance to gauge Rockwell's exposure to some fast-growing spending patterns. As you can see below, some key industries are ramping up spending on automation as the economy reopens. In particular, the strength in automotive and semiconductor spending is one of the reasons auto parts stocks are a must-buy for 2022.
| Rockwell Automation End Market |
Percentage of 2022 Sales |
Full-Year Organic Growth Estimates, Notes |
|
|---|---|---|---|
|
Discrete automation |
25% |
15% |
Automotive up mid-teens with strong EV-related spending, semiconductor up mid-teens, e-commerce up 25% |
|
Hybrid automation |
45% |
15% |
Food and beverage up mid-teens, life sciences up high teens, tire up 20% |
|
Process automation |
30% |
15% |
Oil and gas up mid-teens, mining up mid-teens, chemicals up mid-teens |
Data source: Rockwell Automation presentations.
It also helps to highlight the bullish case for the stock. The bulls see the pandemic as sparking multi-year growth in automation spending as industrial companies seek to reduce reliance on labor and cut production costs.
Moreover, the fourth industrial revolution (characterized by increasing iterative interactions between the digital and physical assets) will enhance the productivity of automation solutions in general. As such, the bulls might concede that Rockwell looks overvalued on a near-term basis, but the surety of its strong long-term growth prospects means it will grow into its valuation over time.
The bears' case
There are probably two related bear cases. The first focuses on absolute valuation and argues that, despite solid growth prospects, Rockwell's valuation is fully up with events. The chart below shows enterprise value (market cap plus net debt) or EV, to earnings before interest, taxation, depreciation, and amortization, or EBITDA. It also shows the price to free cash flow (FCF). On neither valuation does Rockwell look cheap. In addition, the Wall Street consensus is for Rockwell to return to mid-single-digit revenue growth in 2023.
Data by YCharts
Focusing on FCF for the moment helps to outline the second argument, namely relative valuation. For example, the Wall Street analyst consensus is for Rockwell to hit $1.55 billion in FCF in 2024, putting it at 21.7 times FCF in 2024. But here's the thing, its industrial software partner PTC (PTC 1.24%) expects to hit $700 million in FCF in 2024, meaning it trades on less than 20 times management's forecast for 2024.
The difference is that PTC, a company Rockwell is heavily invested in, has double-digit revenue growth prospects thanks to its Internet of Things and augmented reality software. In addition, it's exposed to many of the same spending trends as Rockwell.
If that wasn't all, it's worth noting that industrial giants Siemens and ABB are both pivoting their businesses toward automation and software. They trade on significant discounts to Rockwell.
Data by YCharts
A stock to buy?
All told, Rockwell is a very attractive stock, and I think the answer to the question of whether it will be higher in a few years is yes. But on the other hand, valuations still matter, and it's hard to make the case that Rockwell is the best way to play strong automation spending trends.
