A Leading Industrial Automation Stock
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We recently wrapped up a detailed guide to Investing in IoT Stocks and Companies where we summarized every single article we’ve ever written about the Internet of Things (IoT). In that piece, we discussed the Global X Internet of Things ETF (SNSR) which has about $190 million in assets under management and is managed by Mirae Asset Financial Group. Last year, their research team published a piece on Leading Companies in the Development of the Internet of Things and one of the four companies listed was a $25 billion pure-play industrial automation company.
What’s Industrial Automation?
If you take a shower before you go to work, you might be replaced by robotics process automation. If you take a shower after you come home from work, you might be replaced by industrial automation, something described as:
The technique of making an apparatus, process or system operate by mechanical or electronic devices in lieu of human labor or manual intervention.
Credit: Rockwell Automation
Industrial automation can be found everywhere, from the traffic lights that direct cars, to the HVAC units that make sure a building maintains a consistent internal temperature. Tomorrow’s smart cities will be driven by industrial automation. IoT sensors will communicate with the cloud, and all that big data will be used to create “digital twins” which will allow us to create even more efficiencies. Industrial automation makes for a very compelling investment thesis, so today we’re going to look at a pure-play industrial automation stock – Rockwell Automation.
About Rockwell Automation
Founded in 1903 and hailing from Milwaukee, Wisconsin, Rockwell Automation (ROK) is a $25 billion industrial automation company that dabbles in both hardware and software solutions. At the moment, the company segments their revenues into three areas; discrete (25%), hybrid (40%), and process (35%).
First thing to like here is how they’re spread out across multiple industries. If one industry is experiencing a downturn, other industries may be experiencing an upturn. With today’s pandemic being an exception to the rule, having clients from a diverse set of industries provides the same benefits as holding a portfolio of stocks that crosses multiple industries. The downside to diversification is slower growth. A look at Rockwell’s revenue growth over the years isn’t exactly inspiring.
We can see that the 2009 global financial crisis had a huge impact on revenues for Rockwell. When a financial crisis hits, we can expect this type of business to be sharply impacted. (That’s a bit counterintuitive since one would expect that when times are tight, investments in automation would increase as companies look to reduce costs.) Whatever revenue growth Rockwell is managing is small and inconsistent. If we’re going to invest in something disruptive like collaborative robots or predictive maintenance, we expect to see double-digit growth. Can this 117-year-old company innovate its way to higher levels of growth?
R&D and Innovation
Innovation is what drives technological disruption. Companies can innovate internally through R&D spend, or externally by acquiring other companies that are innovating. It’s a build-vs-buy decision. In the case of Rockwell, their R&D as a percentage of revenues is around 5.5%, much less than the industry average of 10.6% for the industrials sector.
In looking at their investor presentation given late last year, Rockwell talks about where they expect growth to come from. Here’s the slide:
The middle pillar talks about their “Information Solutions and Connected Services” which the company is hanging their hat on for future growth, though it actually makes up a small percentage of what they do at the moment (upwards of $300 million in 2018 or about 4.5% of revenues). Going forward, Rockwell is restructuring their segments so that it becomes easier to measure their progress.
Rockwell’s New Operating Segments
Earlier we talked about how Rockwell segments revenues across three industry groupings; discrete, hybrid, and process. Beginning in fiscal year 2021, the company will begin to report revenue and operating earnings based on three different operating segments: Intelligent Devices, Software & Control, and Lifecycle Services.
The aforementioned “Information Solutions and Connected Services” piece sits under the Software & Control segment which includes references to high-tech technology themes such as predictive analytics, digital twins, augmented reality, robot controllers, and cybersecurity. Their plan is to fuel the growth of this segment by also looking externally.
Late last year, we wrote about Investing in IoT and Augmented Reality with PTC Inc., a company that Rockwell Automation is working closely with. In June 2018, Rockwell purchased $1 billion of PTC (PTC) shares (about 8.4% of the company) with Rockwell Automation’s Chairman and CEO, Blake Moret, joining PTC’s board of directors. PTC plans to integrate their IoT and AR products into Rockwell’s industrial automation platform which allows both companies to cross-sell products across their mutual customer bases.
So far this year, Rockwell Automation has acquired three companies.
- ASEM – Italian firm that builds computing hardware for industrial automation. Builds everything in house and sells to customers in 30 different countries.
- Kalypso – U.S. firm specialized in software delivery and consulting across multiple industries.
- Avnet Cyber and Information Security – Israeli cybersecurity firm whose clients include military organizations, banking and financial institutes, government offices, and private businesses.
These acquisitions are expected to grow revenues by around 4%, while organic growth is expected to fall around 8% due to the effects of the pandemic on global markets.
Income vs. Growth
Regular readers know how much we love dividend growth stocks, but we’re more than happy sacrificing some dividend growth so that companies can invest in technology that drives down costs which increases earnings which ultimately lets them increase dividends even more. Walmart is a good example of a company that has slowed dividend growth in favor of investing in technology like robotics.
Rockwell has been increasing their dividend for ten straight years with an average yearly increase of 13%, giving them a payout ratio of around 40% today. That’s great for income investors, but perhaps that growth should slow until revenues start to show meaningful growth, consistently over time.
Conclusion
Rockwell Automation is a pure-play stock on industrial automation with a plan to grow revenues by focusing on high-growth areas like augmented reality, cybersecurity, and predictive analytics. If they’re hoping to become a dividend champion, they’ll need earnings growth to fuel future dividend increases. Before that, they need to show revenue growth. There’s a lot of growth to be had in industrial IoT, and they’re in a great position to capitalize on it. While 2020 isn’t off to a great start, they can continue to use all that free cash flow to make acquisitions that will help fuel future growth.
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So is Rockwell Automation as buy ?
Hi Stan,
Pundits shouldn’t advise when a stock ought to be bought unless they’re also going to be there to tell you when to sell it. Ideally, investors should buy stocks with longer time horizons measured in decades. Since the market has been quite volatile, you would use dollar cost averaging to get into a position as opposed to engaging in market timing and trying to speculate when a stock is a “buy.”
The analysts over at ARK Invest haven’t included Rockwell in their Innovation ETF while the analysts over at Mirae believe it’s one of the top-four IoT stocks to hold. Rockwell seems to be sitting between the slow and predictable growth of a dividend growth stock and the fast and exciting double-digit growth of a tech stock. This is one of those “skate to where the puck will be” situations where you’re trusting senior management to capture growth through investing in disruptive tech areas like AR, predictive analytics, cybersecurity, etc.