Rockwell International (NYSE:ROK) Falls On Improved Guidance

Rockwell International Forecasts Robust Industrial Rebound

Rockwell International (NYSE:ROK) reported a bit of a mixed quarter and one that sent share prices reeling but investors shouldn’t get too worked up about it. The underlying trends are positive, the outlook is favorable, and the company’s cash-generating power is better than ever. To that end, management raised guidance for the year and we here at MarketBeat think they are being too cautious. Data from across the U.S. manufacturing sector suggest that activity is not only increasing on a YOY basis but accelerating and that is great news for automation.

"The recovery in manufacturing is happening at a much faster pace than we were anticipating, with our total orders exceeding pre-pandemic levels. Demand was especially strong for Intelligent Devices and Information Solutions, which is expected to drive higher growth for the balance of the year. We continue to increase capacity and are expanding our manufacturing workforce to meet this sharp uptick in demand," said Blake Moret, Chairman and CEO.

A Mixed Quarter For Rockwell International

Rockwell International is still struggling with the pandemic but on track to resume YOY growth in the next quarter. That said, the $1.57 billion in reported revenue for the fiscal Q1 period is down -6.5% from last year and flat on a sequential basis. Not only was the revenue growth negative, but it was worse than expected by 250 basis points.

 At the organic level, revenue fell -9.7% but was offset by a 1.8% acquisitional gain and 0.8% positive impact from FX. On a segment basis, Services was worst hit with an 11.6% YOY decline in earnings. Intelligent Devices posted a slightly better -7.1% decline and Software only -2.5%. Intelligent Devices is the company’s largest operating segment by far at 46% of the net. It is expected to post a solid rebound over the next several quarters and drive company results.

Moving down the report, the weakness in core operations led to a small decline in both the gross and operating margin. The gross margin shrank by 43 bps while the operating margin 37 bps but was not enough to offset internal efficiencies and improvement made over the past year. The cash from operations increased by 50% and drove solid gains in both GAAP and adjusted earnings. The GAAP EPS of $5.06 beat the consensus by $3.23 while adjusted earnings beat by a much smaller $0.51.

Notably, the company reported a $0.45 benefit to both GAAP and adjusted earnings from the results of IP litigation, a lot but not enough to offset the company’s earnings strength. The windfall money will be used to accelerate current plans and new investments in future business.

The Rockwell International Dividend Is Safe And Growing

Rockwell International pays a market-average 1.75% in yield but comes with an above-average balance sheet and outlook for growth. The company is paying out about 50% of its consensus earnings figure, a figure that is too low I might add, and has been increasing at a 10% rate for the last 11 years. There is a modest amount of debt on the balance sheet but it is coming down, the company is carrying a large cash balance, leverage is below 2.5X FCF and FCF is more than ample. The only downside is that the most recent dividend increase came over the past quarter so it will be quite a while until the next one.

The Technical Outlook: Rockwell International Sells Off After Earnings

Price action in Rockwell International sold off after the Q1 earnings report and possibly because the guidance was so lackluster. The company issued guidance for both revenue and earnings in a range above the consensus but only just. Considering the average S&P 500 company has beaten its estimates by at least 10% over the past two quarters and that the analysts have only been iffy on ROK the guidance is good but nothing more than the market expected. Now, down about 10%, the stock appears to be putting in a bottom. If support at this level holds investors can expect price action to regroup and eventually move higher. If not then a pullback to more attractive levels near $220 and $230 is possible.