Rockwell Automation Outperforms - Analyst Blog

Rockwell Automation Inc. (ROK) delivered earnings per share (EPS) of $1.04 cents in its fiscal 2011 first quarter ended December 31, 2010, beating the Zack Consensus Estimate of 88 cents and almost double of 53 cents reported during the prior-year quarter.

Sales as reported by the company were approximately $1.36 billion, up 28% from the year ago quarter driven by sales growth across all regions, particularly the emerging markets. Sales as reported by the company were above the Zacks Consensus Estimate of $1.29 billion.

Cost and Margins

Cost of sales in the quarter was $821.9 million, up 28% from $640.7 million in the year-earlier quarter. As a percentage of revenues, cost of sales increased 20 basis points to 60.2% in the quarter. Consequently, gross margin dipped 20 basis points to 39.8% in the quarter.

Selling, general and administrative expenses increased 11% to $347 million and as a percentage of revenues improved 390 basis points to 25.4% in the quarter.

Operating earnings increased 72% to $196.9 million from $114.3 million in the year-ago-quarter, with operating margin increasing 370 basis points year over year to 14.4%.

Segmental Performance

Architecture & Software: The segment reported sales of $613.9 million in the current quarter, up 31% year over year. The segment reported operating earnings of $153.1 million, up 55% from $99 million in the prior year quarter. Segment operating margin increased 380 basis points year over year to 24.9%.

Control Products & Solutions: The segment's sales for the current quarter amounted to $751.9 million, up 26% year over year. Segment operating earnings were $68.9 million, up 82% from $42.7 million and operating margin expanded 290 basis points to 9.2% compared to the year-ago quarter.

Financial Position

As of December 31, 2010, cash and cash equivalents amounted to $769.3 million, down from $813.4 million as of September 30, 2010.

Rockwell's debt position was $904.9 million as of December 31, 2010, flat with fiscal 2010 year end. Rockwell generated cash flow from operating activities of $12.6 million compared with $119.4 million in the year-ago quarter. For the quarter, free cash flow amounted to $4.4 million, while it was $108 million in the first quarter of fiscal 2010. Return on invested capital was 25.7%, well above its long-term goal of 20%. Debt-to-capitalization ratio improved to 57% as of December 31, 2010 from 62% as of September 30, 2010.

Outlook

Based on strong revenue performance in the first quarter along with positive macroeconomic trends and forecasts which indicate that the global industrial is recovering, Rockwell projects revenues between $5.5 billion to $5.7 billion in fiscal 2011. The company now expects EPS to range between $4.30 and $4.60, up from the previous range of $3.80 to $4.20.

Our Take

Rockwell Automation has a strong global market presence. The company focuses on further expanding its global footprint in emerging markets, as it expects automation growth rates in these markets to be higher than growth rates in developed countries. Growth in emerging markets is the company's key to meeting its target of deriving 60% of revenues from outside the U.S. by 2013.

As it enters new markets, Rockwell intends to broaden its portfolio of products, services and solutions. Successful diversification into emerging markets and expansion of its product portfolio will drive the company's top-line growth over the long term. We currently have a Zacks #2 Rank (short-term Buy recommendation) on the stock.

Based in Milwaukee, Wisconsin, Rockwell Automation Inc. is an original equipment manufacturer of industrial automation equipment, application specific integrated software and consulting design services. The company is a leading global provider of industrial automation power, control, and information solutions. Rockwell Automation competes with the likes of ABB Ltd. (ABB), Emerson Electric Co. (EMR) and Siemens AG (SI).