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Here's Why You Should Hold On to Rockwell Automation for Now

Rockwell Automation, Inc. ROK is poised to gain from the strength in heavy industries, positive impact of the tax reform and increased investment. However, negative impact of tariffs and weakness in the Transportation vertical remain headwinds.

This Zacks Rank #3 (Hold) company has an estimated long-term earnings growth rate of 11.6%.

Below, we briefly discuss the company’s potential growth drivers and possible headwinds.

Factors Favoring Rockwell Automation

Northbound Estimates

Investors should consider the positive trends on the estimate revision front. Analysts have been raising their estimates for Rockwell Automation lately, resulting in a favorable earnings picture.

Over the past 60 days, the Zacks Consensus Estimate for the current fiscal and ongoing quarter inched up around 1.4% and 0.5%, respectively.

Positive Earnings Surprise History

Rockwell Automation outpaced the Zacks Consensus Estimate in three out of the last four quarters, with an average beat of 5.58%.

Price Performance

The company has outperformed the industry it belongs to over the past year. The stock has gained 5%, while the industry recorded growth of 2%.

Higher Inventory Turnover Ratio

Over the trailing 12 months, the inventory turnover ratio for Rockwell Automation has been 6.7% compared with the industry’s level of 6.6%. A higher inventory turnover than the industry average implies that inventory is sold at a faster rate, suggesting inventory management effectiveness.

Growth Drivers in Place

Rockwell Automation expects heavy industries to be the primary growth driver, followed by consumer vertical. Growth in emerging markets will be a catalyst for demand for semiconductors. Furthermore, the company will benefit from rising global industrial capital spending in fiscal 2018.

Rockwell Automation remains optimistic about the impact of the tax reform on customers' investment decisions which might benefit future performance. The company believes adjusted effective tax rate for fiscal 2018 is now anticipated to be around 20%, lower than its previous projection of 20.5%. Lower tax rates would translate into improved earnings and also provide the company with greater flexibility to deploy cash.

Moreover, Rockwell Automation will grow on increasing investments and other long-term objectives. These efforts include accelerated software development and commercial resources to fuel growth of its Information Solutions and Connective Services offering. Additionally, Rockwell Automation accelerated investments to expand Process capabilities in order to accelerate growth.

Headwinds for Rockwell Automation

Some of Rockwell Automation’s products and components are sourced from China. Consequently, tariffs imposed by the United States on certain goods imported into the country from China will impact its earnings in fourth-quarter fiscal 2018. Given the competitive environment, the company might not be able to raise prices to combat rise in material costs due to these tariffs.

In addition, the company expects its Transportation vertical to remain weak in fiscal 2018. Even though new program commitments for electric vehicles hold promise, the timing of the capital spending remains uncertain as automotive manufacturers may be deferring MRO spending until they finalize plans for accelerated investment for the electric vehicle market.

Bottom Line

Investors might want to hold on to the stock, at present, as it has ample prospects of outperforming peers in the near future.

Stocks to Consider

Some better-ranked stocks in the same sector are W.W. Grainger, Inc. GWW, Actuant Corporation ATU and Atkore International Group Inc. ATKR. All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Grainger has a long-term earnings growth rate of 12.5%. Its shares have appreciated 117%, over the past year.

Actuant has a long-term earnings growth rate of 15.6%. The company’s shares have gained 24% during the same time frame.

Atkore International has a long-term earnings growth rate of 10%. The stock has rallied 54% in a year’s time.

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