Rockwell Automation (ROK) stock climbed 0.1 % this afternoon. According to our metrics, the company seems overvalued at today's prices. In the below analysis, we will put Rockwell Automation's valuation in the context of its strong growth indicators and mixed market sentiment, which are also strong drivers for share price.
Rockwell Automation, Inc. provides industrial automation and digital transformation solutions in North America, Europe, the Middle East, Africa, the Asia Pacific, and Latin America. The large-cap Industrials company is based in Milwaukee, United States and has 29,000 full time employees.
ROK's P/E Ratio Is Comparable to its Sector Average
Compared to the Industrials sector's average of 20.49, Rockwell Automation has a trailing twelve month price to earnings (P/E) ratio of 22.6 and an expected P/E ratio of 19.3. P/E ratios are calculated by dividing the company's share price by either its trailing 12 month ($11.95) or forward earnings per share ($13.97).
Earnings is another term for the net profits left over after subtracting cost of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Rockwell Automation's P/E ratio is near its sector average of 20.49, we can deduce that the market is fairly valuing the company's earnings.
Rockwell Automation Is Overvalued in Terms of Expected Growth
Rockwell Automation's PEG ratio is 2.06. This metric represents the company's earnings per share divided by its expected growth ratio, and is a useful complement to the price to earnings analysis, because it factors in growth to the valuation. A PEG ratio around or below 1 implies that the market in fairly valuing the company in terms of its growth estimates. But when the PEG ratio is higher, as in Rockwell Automation's case, it tells us the company is overvalued.
ROK Has an Alarming P/B Ratio
The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.
Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since Rockwell Automation's P/B ratio of 8.69 is higher than its sector average of 3.78, such a margin of safety does not exist for the stock.
ROK's Weak Cash Flow Generation Is Troubling
The table below shows that Rockwell Automation is not generating enough cash. A well run company will generally have cash flows that reflect the strength of its underlying business, and in Rockwell Automation's case, free cash flow is growing at an average rate of 0.6% with a coefficient of variability of 725.4%. We can also see that cash flows from operations are evolving at a 0.9% rate, versus 4.2%:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 1,374,600 | 160,500 | 1,214,100 | 78.02 |
| 2022 | 823,100 | 141,100 | 682,000 | -40.21 |
| 2021 | 1,261,000 | 120,300 | 1,140,700 | 13.32 |
| 2020 | 1,120,500 | 113,900 | 1,006,600 | -4.06 |
| 2019 | 1,182,000 | 132,800 | 1,049,200 | -10.67 |
| 2018 | 1,300,000 | 125,500 | 1,174,500 |
Rockwell Automation's Margins Are Strong
If you buy a stock for the long run, you want the underlying business model to be profitable. Gross margins tell you how much profit the company generates compared to the cost of revenue, which is the cost directly related to providing Rockwell Automation's goods and services. Operating margins, on the other hand, tell you how much of these profits the company keeps after you take overhead into account.
Rockwell Automation's Gross Margins
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 9,058,000 | 5,341,000 | 41 | 2.5 |
| 2022 | 7,760,400 | 4,658,400 | 40 | -2.44 |
| 2021 | 6,997,400 | 4,099,700 | 41 | 0.0 |
| 2020 | 6,329,800 | 3,734,600 | 41 | -4.65 |
| 2019 | 6,694,800 | 3,794,700 | 43 | 0.0 |
| 2018 | 6,666,000 | 3,781,100 | 43 |
Rockwell Automation's Operating Margins
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 9,058,000 | 2,023,700 | 18 | 28.57 |
| 2022 | 7,760,400 | 1,766,700 | 14 | -36.36 |
| 2021 | 6,997,400 | 1,680,000 | 22 | 22.22 |
| 2020 | 6,329,800 | 1,479,800 | 18 | 38.46 |
| 2019 | 6,694,800 | 1,538,500 | 13 | -35.0 |
| 2018 | 6,666,000 | 1,587,900 | 20 |
Rockwell Automation's cost of revenue is growing at a rate of 5.9% in contrast to None% for operating expenses. Sales revenues, on the other hand, have experienced a 5.2% growth rate. As a result, the average gross margins growth is -0.8 and the average operating margins growth rate is -2.0, with coefficients of variability of 6.6% and 207.5% respectively.
We See Mixed Market Signals Regarding ROK
Rockwell Automation has an average rating of hold and target prices ranging from $337.0 to $220.0. At its current price of $269.5, the company is trading -6.49% away from its target price of $288.21. 2.3% of the company's shares are linked to short positions, and 82.8% of the shares are owned by institutional investors.
| Date Reported | Holder | Percentage | Shares | Value |
|---|---|---|---|---|
| 2023-09-30 | Vanguard Group Inc | 12% | 13,506,258 | $3,639,936,531 |
| 2023-09-30 | Blackrock Inc. | 8% | 9,491,347 | $2,557,918,016 |
| 2023-09-30 | Capital World Investors | 5% | 5,260,851 | $1,417,799,344 |
| 2023-09-30 | State Street Corporation | 4% | 4,439,772 | $1,196,518,554 |
| 2023-09-30 | Morgan Stanley | 3% | 3,152,104 | $849,492,028 |
| 2023-09-30 | JP Morgan Chase & Company | 2% | 2,752,223 | $741,724,098 |
| 2023-09-30 | Geode Capital Management, LLC | 2% | 2,512,740 | $677,183,430 |
| 2023-09-30 | Bank of America Corporation | 2% | 2,281,405 | $614,838,647 |
| 2023-09-30 | Amundi | 2% | 2,031,363 | $547,452,328 |
| 2023-09-30 | Massachusetts Financial Services Co. | 2% | 1,908,119 | $514,238,070 |
