EUR 850.00 For Business Accounts Only

Morningstar | Pure-Play Rockwell Is Poised to Benefit From IT/OT Convergence, but Shares Remain Expensive

After transferring coverage to a new analyst, we are raising our fair value estimate for Rockwell Automation to $160 from $154 previously. While our views remain largely unchanged from our prior analyst covering the name, we are slightly increasing our stage II growth assumptions to 5.5% from 5.0%. This increase reflects our bolstered confidence in the firm’s earning power. Nevertheless, we remain at the low end of consensus and view the stock as fundamentally overvalued at a forward price/earnings ratio of 20 times our 2018 earnings estimates, as well as 14 times our 2018 EBITDA estimate and toward the higher end of where the stock has historically traded.

Concurrently with this fresh assessment, we are lowering our stewardship rating to Standard based on Rockwell’s board’s prior refusal to engage with Emerson over its third buyout offer at a 140% premium to our fair value estimate. That said, we are retaining our wide moat, stable moat trend, and medium uncertainty ratings. We continue to view Rockwell Automation as a well-run, pure-play automation company that’s long been dominant in discrete manufacturing. Additionally, we remain enthusiastic over the firm’s signature platform, Logix. Logix consists of programmable controllers and a line of products that are interoperable with third-party and some legacy applications.

The advantage of Logix is multi-fold, in our view. First, Logix can perform multiple automation applications, like discrete (e.g. automotive), process (e.g. chemicals), and hybrid (e.g. pharmaceuticals) on a single platform. Second, by using a single, easy-to-use platform, Logix reduces training costs and maintenance expenses. We think Logix’s single platform creates a stickier offering relative to competitors. The advantage of the Logix platform is that manufacturing customers are only obligated to teach employees once on both hardware and software with an easy-to-use package. We think this is important because as technology plays an increasing role in the industrial IoT race, having workers trained and comfortable with that technology becomes increasingly critical.

Third, because Logix works with third-party applications, customers can make incremental improvements to their facilities without having to incur the disruption and expense of a complete system overhaul. Finally, like other automation counterparts, the Logix platform offers customers the opportunity to run analytics on the cloud, allowing for improved asset utilization as well as a lower total cost of ownership. Ultimately, we believe Logix’s value proposition should allow the firm to remain a top player in the growing automation industry. Even so, we believe shares remain expensive as underpinned by our 2-star rating. At current prices, the stock trades at about a 111% premium to our new fair value estimate.