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Rockwell A Stealthy Commodity Play

Posted: Jul 01, 2008 14:24 PM by Gregory S. Davis

Filed Under: Economics

Tickers in this Article: ABB, ROK, SI

Rockwell Automation (NYSE:ROK) is a $5 billion-per-year leader in the field of control systems and process engineering for industrial manufactures. Rockwell's monitoring systems minimize energy losses and reduce mechanical breakdowns for large industrial operations like steel fabricators and petrochemical companies.

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It's one of the many behind-the-scenes players that may benefit from the industrialization of emerging markets. With energy and commodity prices on the move, everyone is looking for what Rockwell is selling.

Commodity Spillover
Total sales increased 9% to $5 billion from the prior year led by its Control Products and Solutions segment. Rockwell has customers in commodity intensive businesses including food and beverage, oil and gas, mining, water and forest products. Higher commodity prices lead to more activity in 2007 from its customers who were eager to find ways to increase productivity while reducing operations costs.

Q2 Breakdown
Rockwell generated 46% of its revenues outside of the U.S. last year, closing in on its target of 50%. Revenue for its most recent fiscal year second quarter, ended March 31, increased nearly 17%. By region Europe, the Middle East and Africa made up the second largest slice of Rockwell's revenue with 24% of the $1.4 billion total.

Despite these upbeat numbers, Rockwell's stock has been on a downward trajectory from the $70 range at the end of last year to the $44 range in late June. The company recently reported weaker-than-expected sales from the U.S .and Europe for its upcoming end of third quarter fiscal year. (Examining how a company makes money can offer clues to its earnings potential. Learn more in Revenue Projections Show Profit Potential.)

International Environment
Rockwell uses GDP growth rates as a way to forecast future demand for its services. The company is expecting growth rates to moderate in fast growing markets including Brazil, India and China for the second half of the year. Slower growth rates are expected from developed markets including the U.S. and Europe. (From unemployment and inflation to government policy, learn what macroeconomics measures in our related article Macroeconomic Analysis.)

Competition
Key competitors include: Swiss-based ABB Ltd (NYSE:ABB), Germany's Siemens AG (NYSE:SI) and also Emerson Electric (NYSE:EMR) based out of Michigan. Value investors will be happy to note Rockwell's low price-to-earnings growth ratio of 0.77. ABB and Siemens also have PEG ratios below 1 at 0.81 and 0.78 respectively.

Conclusion
The fact that Rockwell has fallen out of favor could mean that analyst have priced in a pullback in energy prices or investors may just have a window of opportunity to act. For investors who understand Rockwell's technology and how it fits into the infrastructure theme, Rockwell may make an interesting addition to a portfolio. Even if energy prices do fall, its fair to say that manufacturers will always want to find systems providers like Rockwell that can limit costs and improve efficiency.

By Gregory S. Davis

Gregory S. Davis is the owner of G. Davis Capital, a Registered Investment Advisor with the state of North Carolina dedicated to providing independent investment research and education. His core methodology for choosing investments includes going against emotion eliciting headlines while focusing on asset diversification. G. Davis Capital also publishes the ETF education website, ETFReady.com . Gregory is a graduate of the Wharton School of Business and he has received an MBA from Bowie State University.

Filed Under: Economics

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