Most industrial companies tend to say a similar thing with regard to end market conditions in their specific industry or geographic exposure. In other words, when a bellwether like General Electric Company (NYSE:GE) gives word on its various industry exposures, the commentary from most of its peers like Siemens (NASDAQOTH:SIEGY) tends to follow in step. Interestingly, this wasn't the case with Rockwell Automation Inc. (NYSE:ROK) whose first-quarter results and guidance seemed somewhat out of sync with the market. What is going on? Furthermore, what does it mean for Rockwell Automation?
Summarizing Rockwell Automation's first quarter
The key takeaways from its recent earnings report and commentary:
- Rockwell's management declared that it had "not seen order pattern aberrations" due to the severe winter weather, contrary to what many other industrial companies have reported.
- Emerging markets like China and India were very strong, with sales up 21% and 13% respectively, when many other companies saw weaker performance from these two countries.
- Rockwell outperformed with its oil and gas and food and beverage segments in the U.S., where others had seen weakness.
- Automotive performance was flat, in contrast to companies exposed to the auto sector like Johnson Controls, who have seen stronger conditions.
In fact, the only end market (regional or industry vertical) that strongly correlated with what other industrial companies like General Electric Company, Joy Global, and Caterpillar reported recently, was its weak metal and mining operations. For example, when questioned on the conference call about why its book-to-bill ratio was one to one (declared as being a little lower than normal for the quarter), management replied that the slowdown in mining was the main culprit.
Why was Rockwell Automation so contrarian?
Essentially, it was a confluence of events and specific market positioning that caused such unusual results and guidance. In order to explain, I will run down the reasons in-line with the bullet points listed above.
First, weather had far less of an affect than industrial companies exposed to construction activity had felt. In fact, one of the indicators that the company uses to gauge conditions for investment in automation remained strong over the period; specifically, the industrial production index, or INDPRO, published by the Federal Reserve.
Second, it's fair to say that its emerging market performance was somewhat of a misnomer. For example, China and India were up against "easy comparisons" and despite the 21% rise, management still predicts that its China sales will only rise in the "high single digit" range in 2014. Moreover, management disclosed that India's underlying orders were not as strong as its revenue growth; indicating that growth would slow.
The strength in oil and gas is somewhat puzzling, but it may be down to Rockwell's strong exposure to offshore drilling; a market doing rather better than U.S. onshore. Moreover, General Electric Company previously spoke of strength in national oil company's spending (which tend to be more in emerging markets), while the integrated majors (usually Western companies) were seen as the capex laggards.
As for the auto market, Rockwell seems to be relatively poorly exposed in 2014. The global automobile market seems to be categorized by car manufacturers favoring local automation control providers. Indeed, Rockwell's management implied that its rival, Siemens, would be favored to win new business from German manufacturers like BMW and Audi. Moreover, the Japanese car companies might favor its Japanese rivals. Essentially, the issue in Rockwell's core market is that growth has been so strong in recent years that it's likely to slow.
Is Rockwell Automation a good value?
All told, Rockwell's first quarter was rather unusual within the industrial sector, and the company's guidance of full-year-sales growth of 3%-6% implies a slowing of growth through the year. The midpoint of its full-year EPS guidance of $6.00-$6.35 puts it on a forward P/E ratio of around of around 20 times earnings. Frankly, the stock looks fairly valued, unless growth in the industrial sector surprises on the upside in 2014.