Is It Time to Buy Cyclical Stocks Like Rockwell Automation?

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Is It Time to Buy Cyclical Stocks Like Rockwell Automation?

Industrial stocks have been weak lately, but such conditions usually create some buying opportunities in good-quality companies.

It’s no secret that the industrial sector is slowing in 2019, and a slew of companies have reported weakness in the current earnings season. Given that Rockwell Automation (NYSE:ROK) is one of the most cyclically exposed companies on the market, it’s hardly surprising to see the company cut its full-year earnings guidance. That said, such situations can throw up buying opportunities, and Rockwell is a company with exposure to some very attractive end markets. Let’s take a closer look.

Why Rockwell Automation has been cutting guidance

When industrial companies see slowing end markets, the first thing they look to do is cut expansionary capital expenditures, and that’s why sales of Rockwell’s automation solutions come under threat in any slowdown. A quick look at the evolution of the company’s guidance through 2019 shows how end-market conditions have gotten progressively worse. As a reminder, Rockwell’s financial year runs to the end of September.

Full-Year 2019 Guidance

July

April

January

Sales

$6.6 billion

$6.8 billion

$6.9 billion

Organic growth

1.50%

3.7% to 5.3%

3.7% to 6.7%

Segment operating margin

22%

22%

22%

Adjusted EPS

$8.50 to $8.70

$8.85 to $9.15

$8.85 to $9.25

Data source: Rockwell Automation presentations.

Digging into the details, at the time of the second-quarter results in April, management cut guidance largely on the back of deterioration in the automotive sector. Frankly, that’s nothing surprising. The outlook for light vehicle sales and production has steadily gotten worse in 2019. And as an early adopter of automation, the automotive industry has been reluctant to spend, which has hit companies like Rockwell and machine vision company Cognex (NASDAQ:CGNX) relatively hard.

As such, Rockwell started the year expecting its automotive-related sales to be flat in 2019, only to cut the outlook to mid-single-digit decline in January and then to a double-digit decline in April.

Fast forward to the third-quarter earnings, and the good news is that CEO Blake Moret didn’t reduce the automotive outlook any further. The bad news is that the weakness has spread to other parts of the industrial sector.

A falling stock chart.

Image source: Getty Images.

Strong and weak points

Moret discussed the company’s performance in the third quarter and highlighted the relatively strong and weak areas while noting that “we saw strong growth in our longer-cycle end markets, while shorter-cycle end markets weakened.” Much of Rockwell’s experience has mirrored the recurring theme of earnings season, whereby the industrial supply companies (very short cycle) reported weakness. Cognex reported weakening conditions in automotive and consumer electronics.

Meanwhile, Dover (NYSE:DOV) saw a mix of strength in its biopharma and energy-related businesses and weakness in refrigeration and food equipment. Danaher (NYSE:DHR), a life science- and diagnostics-focused company, had an excellent quarter, and its guidance looks conservative. Honeywell International (NYSE:HON) reported strong aerospace earnings but some weakness in short-cycle businesses, and management talked of some large projects in process industries being pushed out. Rockwell CEO Moret also said, “Some of the project delays that we saw in Q3 impact process.”

 

Strong Sectors

Weak Sectors

Rockwell Automation’s third quarter

Oil and gas, mining, pulp and pap

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