(NYSE: ROK) Rating: BUY Price Target: $ Industry: Electrical Components and Equipment. Investment Action & Thesis. Key Investment Highlights

Transcription

1 Rating: BUY Price Target: $81.50 Industry: Electrical Components and Equipment Close 9/28/2012 Price $ Wk $ $84.71 Shares Out (mm) Mkt. Cap(mm) $9,816.9 Source: Capital IQ Basic Information Beta 1.34 Dividend Yield 2.9% Company Overview Rockwell Automation, Inc. provides industrial automation power, control, and information solutions. It operates in two segments, Architecture and Software, and Control Products and Solutions. Rockwell Automation, Inc. was founded in 1928 and is headquartered in Milwaukee, Wisconsin. Investment Action & Thesis We are initiating coverage on Rockwell Automation (Rockwell or the Company) with a buy rating. We believe Rockwell is a sound company that is being treated unfairly due to the struggling economy and is therefore undervalued. We have a price target of $81.50, representing a 17% upside. We believe Rockwell to be a strong investment because full value should be realized as the economy improves and manufacturing increases. Most importantly we are bullish on the Company because its: 1. Pure automation company with a broad product portfolio and wide scope of solutions does one thing and does it well 2. Global diversification present in both emerging and developed economies 3. Broad customer base with largest customer accounting for less than 10% of revenue 4. High ROIC and increasing margins 5. Strong balance sheet and cash flow generation 6. Approximately 8.9% market share in a $75bn industry plenty of room to grow 7. Management team committed to a long-term strategy and a recently authorized $1bn stock buyback program Key Investment Highlights Pure Automation player with Global Diversification Rockwell specializes in providing automation products and solutions to manufactures across a number of industries and doesn t try to go beyond its means. This commitment to automation has made Rockwell a technology leader, focused on innovation. Rockwell s expertise allows the company to provide manufacturing solutions to a wide range of industries. This customer breadth prevents Rockwell

2 Source: Capital IQ Analysts BCF Industrials Sector Rob Chapruet Jeremy Liu Jake Williams from being susceptible to downturns in any one industry. Rockwell has a global customer base, serving manufacturers in over 80 countries. Sales outside of the United States accounted for 51% of FY2011 total sales. Rockwell sells in every region across the globe, but the largest sales outside of the United States on a country-of-destination basis are in Canada, China, Italy, the United Kingdom and Brazil. Rockwell helps manufactures in developed economies to increase productivity and flexibility as well as to improve safety and sustainability; while also taking advantage of growth drivers associated with developing economies such as ongoing infrastructure improvements, a growing middle class, and increasing demand for commodities. Rockwell s global presence provides the company with protection from single economy downturns. Rockwell s industry and country differentiation strengthens the firm s competitiveness and expands its market opportunities. Strong Financials and Returns Rockwell was hit by the financial crisis and global economic slowdown in 2009, taking a (24.0%) hit to YoY revenue. However, the past two years the Company has seen double digit revenue growth with margins approaching pre-2009 levels. Rockwell also has the best ROIC in its industry, with a 2011 ROIC of 34.1%. This high ROIC is primarily due to high gross margins and strong operating leverage. The Company also has a substantial amount of cash and cash equivalents on its balance sheet which will help it to survive any future economic shocks. Rockwell also has excellent cash flow generation which has allowed the Company to participate in the M&A markets the past few years. Long Term Focused Management Team Rockwell s management envisions the Company as being the most valued global provider of innovative industrial automation and information products, services and solutions. This vision is supported by management s growth and performance strategy, which seeks to: Expand the Company s served market and strengthening its technology and customer-facing differentiation Diversify its revenue streams by increasing its capabilities in new applications and advancing its global presence while continually serving a wider range of industries Make acquisitions that serve as catalysts to organic growth Localization of products and services to be closer to customers and identified growth opportunities Continuously improve quality and customer experience, drive revenue 3-4 annual cost productivity, and optimize end-to-end business processes

3 By implementing the above strategy, management seeks revenue growth of 6-8%, double-digit EPS growth and 60% of the Company s revenue from outside the US. Risks to Investment Investment Assumptions Include Improving Global Economy Rockwell s future growth relies on the state of the global economy. As economic activity slows, credit markets tighten and companies tend to reduce their levels of capital spending, which could result in a decreased demand for the Company s products. However, we believe that the economy is beginning to improve but at a very slow rate. Many signals also point to improving but slower industrial growth (see exhibit A). In reality, we have no real insight as to whether the economy will improve but we believe that there will be improvement in the long run. Foreign Exchange rates Due to Rockwell s global diversification and 51% of its revenues coming from outside the US, the Company is susceptible to changes in FX rates. The recent volatility in currency rates could have a negative impact on Rockwell s financial statements. Business Overview Rockwell is a leading global provider of industrial automation power, control and information solutions that help manufacturers achieve a competitive advantage for their businesses. The Company s products and services are designed to meet its customer s needs to reduce total cost of ownership, maximize asset utilization, improve time to market and reduce manufacturing business risk. Rockwell operates in two segments, Architecture and Software, and Control Products and Solutions. The Architecture and Software segment offers control platforms that perform multiple control disciplines and monitoring of applications, including discrete, batch and continuous process, drives control, motion control, and machine safety control. This segment also offers software products, such as configuration and visualization software used to operate and supervise control platforms, advanced process control software, and manufacturing execution software to enhance manufacturing productivity and meet regulatory requirements. The Control Products and Solutions segment provides low and medium voltage electro-mechanical and electronic motor starters, motor and circuit protection devices, AC/DC variable frequency drives, push buttons, signaling devices, termination and protection devices, relays and timers, and condition sensors. The company sells its products and solutions to the food and beverage, transportation, oil and gas, metals, mining, home and personal care, pulp and paper, and life sciences markets through independent distributors and direct sales force in the United States, Canada, Europe, the Middle East, Africa, the Asia Pacific, and Latin America. The Company continues the business founded as the Allen-Bradley Company in Demand for Rockwell s products is driven by: Investments in manufacturing such as upgrades, modifications and expansions of existing facilities Customer needs for productivity and cost reduction, sustainable production, quality assurance and overall global competitiveness Demand for customer products Levels of global industrial production and capacity utilization

4 Strengths, Weaknesses, Opportunities, and Threats (SWOT) Analysis Strengths Strong balance sheet and cash flow generation Diverse customer base and global presence Management focused on the long term Opportunities $1bn stock buyback plan will increase EPS by 11% Manufacturing growth in emerging markets Weaknesses Potential headwinds due to pension obligations Volatile FX rates can negatively impact margins and growth Cyclical company Threats Susceptible to a global economic downturn Highly competitive industry that relies on innovation Top Ten Shareholders Source: CaptialIQ

5 Management Keith Nosbusch (Chairman and CEO) Keith Nosbusch was appointed chief executive officer of Rockwell Automation in February Prior to this appointment, Nosbusch served as the president of Rockwell Automation Control Systems and an officer of the corporation, positions he held since November Nosbusch's career began in 1974 when he joined Allen-Bradley as an application engineer, and since then he has held numerous positions of increasing responsibility. Theodore Crandall (CFO) Theodore D. Crandall has been the Chief Financial Officer and Senior Vice President of Rockwell Automation Inc. since October Mr. Crandall served as Senior Vice President of Components and Packaged Applications Group of Rockwell Automation Control Systems of Rockwell Automation Inc., since August 2000 and served as its Head of Control Products & Solutions Segment until April 5, 2007and Senior Vice President of Control Products and Solutions, since February He served as Interim Chief Financial Officer of Rockwell Automation Inc., from April 5, 2007 to October Martin Thomas (Senior Vice President of Operations) Martin Thomas, Marty has been Senior Vice President of Operations & Engineering Services at Rockwell Automation Inc. since February Mr. Thomas is responsible for Rockwell Automation's Global Supply Chain, industrialization and Engineering Services. Mr. Thomas served as Rockwell Automation's Vice President Of Operations And Engineering Services from November 2005 to February 2007.

6 Financial Projections and Valuation DCF

7 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 (NYSE: ROK) CompCo Manufacturing Indicators (Exhibit A) Industrial Equipment Spending PMI Industrial Production Index Capacity Utilization Percentage

8 Important Disclosures Babson College Fund The Babson College Fund (BCF) is an academic program in which selected students manage a portion of the Babson College endowment. The program seeks to provide a rich educational experience through the development of investment research skills and the acquisition of equity analysis and portfolio management experience. Please visit for more information. Analyst Contact Information Rob Chapruet- rchapruet1@babson.edu Jeremy Liu- jliu6@babson.edu Jake Williams- jwilliams26@babson.edu Definition of Ratings BUY: Expected to outperform the IYK producing above average returns. HOLD: Expected to perform in line with the IYK producing average returns. SELL: Expected to underperform the IYCK producing below average returns. References Capital IQ Thomson ONE Morningstar EDGAR SEC Filings Bloomberg

9