Rockwell Automation Inc.

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1 March 16, 2015 Rockwell Automation Inc. Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 07/31/2011 Current Price (03/13/15) $ Target Price $ Week High $ Week Low $98.60 One-Year Return (%) Beta 1.44 Average Daily Volume (sh) 883,409 Shares Outstanding (mil) 135 Market Capitalization ($mil) $15,055 Short Interest Ratio (days) 4.56 Institutional Ownership (%) 77 Insider Ownership (%) 1 Annual Cash Dividend $2.60 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 7.9 Earnings Per Share (%) 20.9 Dividend (%) 17.2 using TTM EPS 17.6 using 2015 Estimate 16.9 using 2016 Estimate 15.6 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page SUMMARY Risk Level * (ROK-NYSE) In the first-quarter fiscal 2015, Rockwell Automation s adjusted earnings of $1.64 per share increased 12% on a year over year basis, while revenues dipped 1%. The company now expects sales of about $6.6 billion in fiscal 2015 and has narrowed its earnings per share guidance to a range of $6.50 to $6.80, citing significant headwind from a stronger U.S. dollar and lower oil prices. Rockwell Automation maintains its long-term financial goal to be achieved through the diversification of sales streams, quality improvement and building a partner network. The company will also benefit from growth in automation and additional share repurchases. However, volatility in the foreign exchange rate remains a matter of concern. Hence, we are reaffirming our Neutral recommendation on Rockwell Automation with a target price of $117. Low, Type of Stock Large-Growth Industry Indl Auto/Rbtcs Zacks Industry Rank * 192 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Dec) (Mar) (Jun) (Sep) (Sep) ,489 A 1,523 A 1,624 A 1,716 A 6,352 A ,592 A 1,601 A 1,650 A 1,782 A 6,624 A ,574 A 1,563 E 1,638 E 1,796 E 6,571 E ,629 E 6,777 E Note: 2014 Quarterly figures will not add up due to rounding off Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Dec) (Mar) (Jun) (Sep) (Sep) 2013 $1.23 A $1.33 A $1.54 A $1.62 A $5.71 A 2014 $1.47 A $1.35 A $1.49 A $1.86 A $6.17 A 2015 $1.64 A $1.44 E $1.59 E $1.93 E $6.60 E 2016 $1.74 E $7.13 E Note: 2013 Quarterly figures will not add up due to rounding off Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Based in Milwaukee, WI, Rockwell Automation Inc. (ROK) is an original equipment manufacturer (OEM) 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. The company has a network of more than 5,600 distributors, system integrators and agents, serving customers in more than 80 countries. Outside the United States, the company s principal markets are in Canada, Italy, China, the United Kingdom, Germany, Brazil, Australia, Korea, and France. The company has two operating segments: Control Products & Solutions and Architecture & Software. Control Products & Solutions, the larger division (55% of revenues in the first quarter of fiscal 2015), provides a comprehensive portfolio of intelligent motor control and industrial control products. Products of this segment are primarily marketed under the Allen Bradley brand name. Its major markets include food and beverage, automotive, oil and gas, mining, and home and personal care. The segment s product offering includes: A. Low voltage and medium voltage electro-mechanical and electronic motor starters, motor and circuit protection devices, AC/DC variable frequency drives, contactors, push buttons, signaling devices, termination and protection devices, relays and timers, and condition sensors. B. Value-added packaged solutions, including configured drives, motor control centers, and custom engineered panels for OEM and end-user applications. C. Automation and information solutions, including custom-engineered hardware and software systems for discrete, process, motion, drives, and manufacturing information applications. D. Services involving total life-cycle support, including multi-vendor customer technical support and repair, asset management, training and predictive, and preventative maintenance. The Architecture & Software division (45%) contains all elements of the company s integrated control and information architecture capable of connecting the customer s entire manufacturing enterprise. Architecture & Software s Integrated Architecture and Logix controllers perform multiple types of control and monitoring applications, including discrete, batch, continuous process, drive system, motion and machine safety across various industrial machinery, plants and processes, and supply real time information to supervisory software and plant-wide information systems. Logix helps to solve the lack of integration between automation control systems and enterprise resource planning systems (ERPs). Architecture & Software s products include control platforms, software, I/O devices, communication networks, high performance rotary and linear motion control systems, electronic operator interface devices; condition based monitoring systems, sensors, industrial computers and machine safety components. These products are deployed widely across industries to end users and OEMs to reduce total cost of ownership, maximize asset utilization, improve time to market, and reduce manufacturing business risk. Equity Research ROK Page 2

3 REASONS TO BUY Rockwell Automation continues to target its long-term financial goal of 6%-8% revenue growth. The company also maintains its objective of delivering double-digit EPS growth, return on invested capital (ROIC) of more than 20% over the long term and cash flow of around 100% of adjusted income. These long-term goals will be supported by Rockwell Automation s strategy involving diversification of sales streams by expansion of products portfolio, solutions and services and global presence. The company also aims to achieve growth rates in excess of the automation market by expanding its served market, strengthening competitive differentiation and serving a wider range of industries and applications. Rockwell Automation s objectives also include market share growth by gaining new customers and capturing a larger share of existing customer spending, improve quality and customer experience as well as enhancing market access by building channel capacity and partner network. Rockwell Automation witnessed 3% year-over-year increase in Logix sales in the first quarter of fiscal Logix organic sales increased 7%, with the highest growth rate in Latin America. The information-enabled Logix controllers provide integrated multi-discipline control. The Logix technology enabled Rockwell Automation to effectively compete with traditional Distributed Control Systems (DCS) providers for continuous process applications. The company is also expanding the capacity of Logix in the Gulf region in order to provide solutions to process customers. Rockwell Automation will benefit from expansion in the emerging markets and opportunistic acquisitions. In Oct 2014, Rockwell announced that it has purchased the assets of ESC Services, Inc., a global hazardous energy control provider of lockout-tagout services and solutions. The acquisition will enable Rockwell Automation to increase asset utilization and strengthen enterprise risk management, while adding safety to its growing portfolio of data-driven, cloud-enabled services. Previously in January, Rockwell acquired Jacobs Automation, a leader in intelligent track motion control technology. This technology improves performance across a wide range of packaging, material handling, and other applications for the global machine builder market. During the first quarter, Rockwell Automation repurchased 1.55 million shares for $167 million. As of Dec 31, 2014, the company had $884 million worth of shares remaining under its $1 billion share repurchase authorization. Further repurchases will support the stock. Additionally, on Feb 12, Rockwell Automation announced the offering of two series of notes aggregate principal amount of $600 million. One series, consisting of $300 million notes, will mature in Mar 2020 and bear an annual interest rate of 2.050%. The second series, consisting of $300 million notes, will mature in Mar 2025 and bear an interest rate of 2.875%. Rockwell Automation intends to use the net proceeds from the offering to repay outstanding commercial paper and for general corporate purposes. Equity Research ROK Page 3

4 From the geographic standpoint, Latin America was the fastest growing region in the first quarter, with around 18% year-over-year sales growth. Growth was strong across end markets, but particularly in food & beverage. The company expects Latin America to continue to be its highest growing region throughout the year. Brazil and Mexico will also grow by about 10%. Regarding vertical markets, continued healthy investment and transportation will drive growth. REASONS TO SELL In response to the strong U.S. dollar and the current oil & gas environment, Rockwell Automation narrowed its 2015 EPS guidance to a range of $6.50 to $6.80 from the previous range of $6.55 to $6.95. The company now expects sales of about $6.6 billion in fiscal This includes a currency headwind of about 4.5 points and organic sales growth in the range of 2.5% to 5.5%. For the full year, owing to the dollar s continued appreciation against other currencies, Rockwell Automation expects currency headwinds to reduce sales by 4.5 points. The difference in currency impact from previous to current guidance results in a reduction and reported sales for the full year of about $180 million. The company has also slashed the high end of its organic growth guidance from 6.5% to 5.5%. Although Rockwell Automation has not witnessed any negative impact on its business in the first quarter, its capital expenditure might get affected by lower oil prices. However, the company expects its oil and gas customers to complete large projects already underway and proceed with those they consider strategic; there remains some near-term concern regarding customers capital spending plans for Most of Rockwell Automation s oil & gas customers have not declared their capital spending plans for 2015, although it is expected that oil and gas producers will slash capital spending for The global mining industry has been noticeably sluggish due to oversupply and weak commodity prices, particularly in China and Australia. Continued weakness in the mining industry and lack of major projects will continue to affect Rockwell s results in the coming quarters. Rockwell Automation faces stiff competition in all of its market segments. The company, therefore, needs to continually develop advanced technologies for new products and product enhancements to in order to counter competition. Developing new products requires high levels of innovation, and the development process is often lengthy and costly. The company s increased spending to support growth will continue to put pressure on margins in the near term. RECENT NEWS Rockwell Automation Beats Q1 Earnings, Narrows Guidance Jan 28, 2015 Rockwell Automation, Inc. reported adjusted earnings of $1.64 per share in first-quarter fiscal 2015, up 12% from $1.47 earned in the prior-year quarter. Results beat the Zacks Consensus Estimate of $1.49, a positive earnings surprise of 10%. The company s reported earnings came in at $1.56 per share, rising 11% from $1.41 in the year-ago quarter. Total revenue was $1,574 million in the quarter, down 1% year over year due to currency headwind. Revenues, however, beat the Zacks Consensus Estimate of $1,562 million. Organic sales grew 2% year over year, primarily on the back of strength in the Architecture & Software segment as well as in the Latin America region. Equity Research ROK Page 4

5 Operational Update Cost of sales dipped 4% year over year to $887 million. Gross profit rose 4% to $687 million from $664 million in the year-ago quarter. Gross margin expanded 200 basis points (bps) year over year to 43.7%. Selling, general and administrative expenses increased marginally by 0.4% from the prior-year quarter to $386.9 million. Consolidated segment operating income was $346.8 million, up 6% from $328 million in the first quarter of Operating margin expanded 140 bps year over year to 22% on the back of higher organic sales, strong productivity, and favorable mix, partially offset by increased spending. Segment Results Architecture & Software: Net sales increased 2% year over year to $708 million in the quarter. Segment operating earnings were $221.4 million, as against $211.9 million in the year-ago quarter. Segment operating margin increased 90 basis points to 31.3% from 30.4% a year ago. Control Products & Solutions: Net sales went down 3% year over year to $867 million. Segment operating earnings improved 8% to $125 million from $116 million in the year-ago quarter. Segment operating margin expanded 150 bps year over year to 14.5%. Financials As of Dec 31, 2014, cash and cash equivalents amounted to $1,291 million versus $1191 million as of Sep 30, As of Dec 31, 2014, long-term debt was $905.6 million, flat with the amount as of Sep 30, Cash from operations for the first quarter were at $268 million compared with $203 million in the prioryear quarter. Return on invested capital was 30.7% as of Dec 31, 2014, compared with 31.4% as of Dec 31, During the reported quarter, Rockwell Automation repurchased 1.55 million shares for $167 million. As of Dec 31, 2014, the company had $884 million worth of shares remaining under its $1 billion share repurchase authorization. Guidance Rockwell Automation now expects sales of about $6.6 billion in fiscal This includes a currency headwind of about 4.5 points and organic sales growth in the range of 2.5% to 5.5%. The company narrowed its earnings per share guidance to a range of $6.50 to $6.80 from the previous range of $6.55 to $6.95 due to more significant headwind from a stronger U.S. dollar and the impact of lower oil prices. VALUATION Currently, shares of Rockwell Automation are trading at 16.9x our 2015 EPS estimate of $6.60. The company s trailing 12-month earnings multiple is 17.6x, compared with the 21.0x average for the peer group and 18.0x for the S&P 500. During the past 5 years, the company s shares have traded in the range of 11.7x to 31.8x. We are maintaining our Neutral recommendation on Rockwell Automation, which indicates that it will perform in line with the market. Our target price is $117 or 17.7x 2015 EPS. Equity Research ROK Page 5

6 Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Rockwell Automation Inc. (ROK) Industry Average S&P Fanuc Corporation (FANUY) irobot Corporation (IRBT) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Rockwell Automation Inc. (ROK) Industry Average S&P Equity Research ROK Page 6

7 Earnings Surprise and Estimate Revision History Equity Research ROK Page 7

8 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of ROK. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1129 companies covered: Outperform %, Neutral %, Underperform 8.9%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research ROK Page 8