Rockwell Automation's Lucky Quarter?

Rockwell Automation's (NYSE:ROK) recent first-quarter earnings report had more than its fair share of bullish signals to encourage investors in the stock. Indeed, Rockwell looks well-placed in an environment in which most forecasters are predicting a pickup in North American industrial production. So is it time to pile into the stock? Let's look at the cases for and against.

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Rockwell Automation, Ingersoll-Rand and Parker-Hannifin are Buys

Rockwell Automation (NYSE:ROK), Ingersoll-Rand PLC (NYSE:IR), and Parker-Hannifin Corp. (NYSE:PH) are three industrial companies that have seen their stock prices go up by more than 40% in the last year. Can these stocks maintain an upwards momentum this year? Let's take a brief look at prospects for all three now that earnings reports for the first calendar quarter of 2017 are all in.

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Is Rockwell Automation a Stock to Buy for 2017?

Rockwell Automation's strong rise in 2016 is reflective of a general change in sentiment toward industrial stocks that took place as the year progressed. So how are the company and stock positioned for 2017? Can Rockwell's stock have another strong year?

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Rockwell Automation Stock Now Looks Fully Valued

As I write, Rockwell Automation stock is up by a third on a year-to-date basis, but the question investors will be asking is whether the run can continue in 2017.
In this vein, let's look at management's commentary and outlook from the recent fourth-quarter results and investor conference. Here's what you need to know before making an investment decision.

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Time to Buy Rockwell Automation Stock?

It's been a curious sort of year for investors in Rockwell Automation As the year has progressed, management has been lowering sales and earnings expectations on the back of a worsening economic outlook, and meanwhile the stock is up nearly 18% as I write -- significantly outperforming the S&P 500 and its peers. What's going on, and is the stock still a good value?

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Emerson Electric or Rockwell Automation Stock?

Emerson Electric and Rockwell Automation have both outperformed the S&P 500 year to date. As with Cognex Corp. , both companies have substantive exposure to industrial automation. It's somewhat surprising to see such share price outperformance during a period of weak economic growth, but clearly, the market is pricing in a second-half recovery. The question is, which stock is a better buy now?

EMR data by YCharts

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Rockwell Automation Stock is Still Attractive

Rockwell Automation (NYSE:ROK) lowered its full-year guidance during its first-quarter results presentation, but as I write, the stock is up 4% year-to-date and easily beating the S&P 500 and the broader industrial sector (measured by the iShares Dow Jones US Industrial ETF: IYJ in the graph below). What's going on and can it continue?

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Is Rockwell Automation ROK a Stock to Buy for 2016?

There's no doubt that the industrial automation sector has had a disappointing 2015. Falling oil prices have pressured capital spending in the upstream oil industry, and slowing industrial growth -- not least in emerging markets -- created caution in industrial capital spending. That said, Rockwell Automation  has notably outperformed peers such as Emerson Electric and ABB Ltd. Let's look at why, and examine whether Rockwell's stock can outperform in 2016.

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Why Emerson Electric is set for a Better Second Half

Whenever a major industrial player like Emerson Electric Co.  (NYSE: EMR  ) gives results the market should sit up and take notice. In this instance, the results and the narrative around them suggest an ongoing, but fragile, economic recovery. Emerson's underlying performance was better than the headline numbers suggested, and there was some good news within the report for companies like Rockwell Automation (NYSE: ROK  ) and Cognex Corporation (NASDAQ: CGNX  ) . With that said, what should Fools be looking for in the global economy that might benefit Emerson going forward?

Emerson Electric's second-quarter results
Emerson's headline numbers weren't great with sales falling 2% in the quarter, and earnings before interest and taxes also declining 2%. A quick look at a segmental breakdown of Emerson's revenue and earnings growth reveals the trend in the quarter.


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Rockwell Automation Equity Research

There wasn't an awful lot wrong with Rockwell Automation's  recent second-quarter results, but when a stock is priced to perfection, any hiccup will cause a negative overreaction. In truth, its earnings and commentary were slightly more bullish concerning the underlying trading conditions, and investors in companies like Emerson Electric  and General Electric  have reason to look more favorably upon future prospects. Rockwell's numbers were better than they looked.

Rockwell Automation's reports another unusual quarter
Last time around, Rockwell reported an "unusual quarter" in that it was seeing relative strength in areas where other industrial companies were weak, and vice versa. This time, its earnings report was unusual, but for a different reason: namely, because underlying conditions got better, but a combination of foreign exchange effects and tax increases meant that its full-year guidance was left unchanged.

The following table explains the subtleties of its full-year guidance change

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Can GE Continue to Outperform?

It's hard to make the case that General Electric  isn't necessarily the best bellwether for the industrial economy, but I'm going to do it anyway! The argument is that the company's profitability is skewed toward a few large sectors of the economy. Ultimately, a company like Emerson Electric   may prove more indicative of the industrial sector overall, with Rockwell Automation  providing a good proxy for capital spending in the manufacturing sector.

Indeed, understanding General Electric's profit drivers is the key to Fools answering another question. Specifically, just how did the company record 8% revenue growth in its industrial segment in the recent quarter?

General Electric outperforming its peers in the first quarter
The question is relevant because Emerson Electric is expecting underlying growth of only 3%-5% this year, while Rockwell Automation's forecast of 3%-6% growth is pretty similar. With this in mind, is General Electric likely to continue growing its industrial revenue at nearly double what its peers are doing?

 

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Rockwell Automation Equity Research

Most industrial companies tend to say a similar thing with regard to end market conditions in their specific industry or geographic exposure. In other words, when a bellwether like General Electric Company  gives word on its various industry exposures, the commentary from most of its peers like Siemens  tends to follow in step. Interestingly, this wasn't the case with Rockwell Automation Inc. whose first-quarter results and guidance seemed somewhat out of sync with the market. What is going on? Furthermore, what does it mean for Rockwell Automation?

Summarizing Rockwell Automation's first quarter
The key takeaways from its recent earnings report and commentary:

 

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