EUR 850.00 For Business Accounts Only

Morningstar | Rockwell's Outlook, Performance, and Foray into Industrial Internet of Things Prompt Raising Our FVE

We are raising our fair value estimate for wide-moat-rated Rockwell Automation to $154 per share from $150 previously on the heels of strong performance and its latest guidance raise. Even so, we still consider shares in this high-quality industrial to be modestly overvalued, and we are skeptical that the company can sustain this level of performance on a normalized basis. Reported sales of the company in the fiscal third quarter rose to $1.69 billion, up 6.2% year over year. On an organic basis, sales rose 5.7% year over year. Net income was $198.6 million, down 8% year over year.

However, the decrease in GAAP earnings was primarily driven by $76.8 million of fair value adjustments recognized in connection with the strategic partnership formed with PTC, Inc. These fair value adjustments are two-fold. First, they include a $7 million mark-to-market loss on investment based on PTC's closing share price on the last day of the prior quarter. Second, they include a temporary $70 million valuation adjustment until registration of PTC Securities. Accounting convention requires Rockwell to discount the value of its investment in PTC until these shares are registered. We agree with management's adjustments to EPS and believe these paper losses do not impact business fundamentals. For example, fluctuations in PTC's share price are to be expected, and paper losses on one date of an adjustment can quickly appear like paper gains on another date. Net of these adjustments and fair value adjustments for aftertax, nonoperating pension costs, and adjusted net income would have risen by 18.5% year-over to $272 million, or $2.16 on an adjusted EPS basis.

With its strategic partnership with PTC, Rockwell is clearly signaling its deepening commitment to its industrial Internet of Things offerings--which it dubs its "connected enterprise"--by building on its software capabilities. PTC is mostly known for selling computer-aided design software to enterprise customers like Caterpillar. The rationale behind this deal repeats many of the same virtues often extolled by industrial Internet of Things proponents, including increased productivity and efficiency, reduced risk, and greater interoperability.

Turning over to underlying performance, Rockwell's organic growth this fiscal third quarter was helped by Logix growth of 10% (within the Architecture and Software segment), process growth of 8%, and double-digit growth in information solutions and connected services. Segment operating margins rose 140 basis points year over year to 22.5%, mostly thanks to higher organic sales growth, we think mostly due to operating leverage. Growth in the U.S. was primarily helped by its heavy industry and consumer end markets. On the heels of this performance, management raised its adjusted EPS guidance to $7.90 to $8.10, from $7.70 to $8.00 previously.