Rockwell Automation (NYSE:ROK) is the former Allen-Bradley Co. of Milwaukee, bought by Rockwell International in the 1980s and spun-out 20 years later. The company retains the Rockwell name and ROK stock ticker symbol.
Rockwell has always been about factory automation, machine controls and the like. This puts Rockwell squarely in the center of the machine internet, with factories automating under software control.
Rockwell has divided its part of this work with Microsoft (NASDAQ:MSFT), and the companies recently extended their partnership for five years. The idea is to connect Rockwell controllers to the Microsoft cloud so factories can be reconfigured using real data.
The result could be a hot stock, although it looks fully valued now. Rockwell opened for trade Oct. 27 at $237. That’s a market cap of $27.5 billion on expected sales of $6.5 billion. The price-earnings ratio is 36, and the $1.02/quarter dividend’s yield is down to 1.72%.
Changing for the Machine Internet
Rockwell was hit hard by the novel coronavirus.
Sales for the June quarter were down more than 16% from a year earlier. Net income, when fully adjusted, was down 47%. The company’s press release reporting the results talked about “resiliency,” about conditions being “difficult.” The company even cut salaries on executives and non-production employees during the worst of the downturn. Those cuts are only now in the process of being returned.
To prepare for the machine internet, Rockwell didn’t just hand off work to Microsoft. It bought a software consulting firm called Kalpyso in May. It followed up in October with the purchase of Oylo, a cybersecurity firm in Spain. Hardware may become software, but some hardware will stay hard, and all of it needs to be secured.
Justify My Love
Investors noted because the stock wasn’t dinged for the bad second quarter. Shares recovered their pre-pandemic price by July, and the stock’s gain so far in 2020 is 17%, well ahead of the average S&P 500 stock.
But that doesn’t mean the stock isn’t subject to gravity. It now rises and falls with the market. The average price target for the stock is below its current price, with six of 15 analysts saying “buy,”, one saying “sell” and eight saying very little.
To even justify that valuation Rockwell needs to grow, which it hasn’t been doing lately. The 2020 sales total should be lower than that of 2018, and profits lower than those in 2017. The stock is riding a high from the Microsoft announcement but that won’t last. The two companies have already developed 20 use cases across the production of food, cleaning products and life sciences. More will be needed. The company’s product announcements, like an edge gateway, read like those of a computer company. To some extent, they are.
The Bottom Line on ROK Stock
What Rockwell is selling to investors today is promise. Earnings for the September quarter are due Nov. 10. Analysts expect profits of $1.73/share on revenue of $1.57 billion.
Two types of investors are looking at Rockwell. Income investors compare that 1.72% yield to a bond, and a 30-year government bond now yields just 1.64%.
Speculative investors, seeing how the machine internet will transform how things are made, are also looking for a price that makes sense. The promise of Rockwell is fully valued in today’s stock price. But a disappointing result on Nov. 10, could be a catalyst for a short-term fall. Stocks could be especially volatile in November if election results are muddled and no stimulus seems forthcoming.
That would be your time to get in.
At the time of publication, Dana Blankenhorn had a long position in MSFT.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn.