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Stocks  | November 24, 2020

Rockwell Automation bears are too bearish.

That’s the conclusion of Morgan Stanley analyst Joshua Pokrzywinski, who upgraded stock in Rockwell to Buy from Hold on Monday. His price target went to $288 a share from $267. The stock was up 1.7% in early trading to $251.87 a share.

Pokrzywinski says bears on the stock are “way too early,” and that capital spending by businesses—which drives Rockwell’s (ticker: ROK) sales—is recovering. It’s never a good idea to sell cyclical shares when things are improving. And capital spending is being channeled into automation technology, the area in which Rockwell is a global leader, Pokrzywinski says.

Wall Street sentiment about the stock isn’t particularly positive. Only about 35% of analysts covering the company rate shares at Buy, while the average Buy-rating ratio for stocks in the Dow Jones Industrial Average is about 58%. More than 20% of analysts rate shares Sell, compared with the average for stocks in the Dow at about 7%.

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Valuation might be the reason for the above-average caution. Shares are trading at about 29 times estimated earnings for the next 12 months. That is a big premium to the historical price/earnings ratio of 18.4 times.

Pokrzywinski’s $288 price target, in fact, works out to roughly 33 times estimated earnings for the next 12 months. A premium is warranted, he says, because Rockwell is a leading, pure-play automation company.

Sales growth is accelerating too. Analysts expect sales to grow 5.4% a year on average over the coming five years. Sales have been roughly flat over the past five years. They grew an average of 2.7% a year over the past decade.

Rockwell’s PE ratio has risen recently as the stock has gone up faster than estimates for earnings. It’s a common theme for stocks in 2020. Rockwell shares are up about 22% year to date, better than comparable returns of the S&P 500 and Dow.

Estimates for Rockwell’s earnings in fiscal 2021 earnings have actually gone down, from about $9.50 to $8.50 a share, over the past year as the pandemic has slowed down the industrial economy. A stock rising while earnings estimates are declining is a recipe for a higher PE ratio. But 2021 earnings estimates bottomed out at about $7.50 a share in April and have been on the march higher since then.

The PE ratio for the S&P has gone from about 17 times estimated next year’s earnings to 21 times so far in 2020. Forecasters predicted $193 in aggregate per-share earnings for the S&P at the start of the year. That number bottomed out at about $160 midyear and is back up to more than $170.

Barron’s recently wrote positively about Rockwell, saying automation trends would benefit the stock for many years. That article appeared in October, so it is still early to evaluate the call. Shares are up about 3% since the story was published.

Rockwell stock was up 1.7% in early trading Monday to $251.87 a share.


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