By Aaron Back
There is a factory-building boom under way in the U.S., and Rockwell Automation ROK 1.62%increase; green up pointing triangle stands out as an underappreciated beneficiary.
Rockwell supplies hardware and software for factory automation, including for cutting-edge industries such as electric vehicles and semiconductors. This puts the Milwaukee-based company at the center of powerful trends in the U.S. economy.
Yet its stock has lately been moving on short-term concerns, such as a minor supply disruption in its most recent quarter. That spells opportunity for investors.
The current pace of factory investment in the U.S. is nothing short of remarkable. According to U.S. Census Bureau data, total annualized manufacturing construction spending in the U.S. came to nearly $196 billion in June, which was the highest reading in at least two decades, up 80% from a year earlier and up 148% from two years prior.
“We’re seeing indications of really the early innings of what we think is a multiyear investment cycle for certain types of manufacturing,” said Rockwell Chief Executive Blake Moret in an interview.
Several forces are at work. Pandemic disruptions and rising geopolitical tensions with China have put new focus on supply-chain resilience and security, driving some reshoring of industry. New subsidies in the Chips Act and the Inflation Reduction Act are turbocharging investment in the domestic production of semiconductors, EV batteries, solar panels and so on. At the same time, a tight labor market encourages investment in automation across all categories of manufacturing.
Take semiconductors. Rockwell assists chip makers with facilities management and control systems, maintaining the temperature, cleanliness and air flow in sensitive areas. It also provides technology for transporting wafers around the facilities. Moret says these semiconductor offerings were “a very strong application for us in Asia, and as people are building new fabs in the U.S., it’s a great opportunity because we have the highest market share in the U.S.
Analysts at UBS note that the U.S. now accounts for around 16% of global industrial production, down from an average of around 23% in the decade before China joined the World Trade Organization in 2001. They estimate that bringing that ratio back up to 20% by 2040 would require some $4.5 trillion of capital investment—a huge market opportunity for companies such as Rockwell.
Nonetheless, Rockwell’s stock tanked by 7.5% in a single day when it reported results for its fiscal third quarter earlier this month, and it has continued drifting downward since. The company beat consensus analyst estimates for earnings per share, according to Visible Alpha. But it missed estimates slightly on revenue due to what it described as a “longer-than-expected changeover to a new third-party logistics supplier at our North American distribution center,” which caused the company to miss “almost a week of planned shipments.”
Analysts were most disappointed by the company’s guidance on total orders: It said it now expects orders for the full fiscal year to come in between $8.5 billion and $9 billion, down from its guidance the prior quarter of “about $9 billion.” Total orders in the first half came to $4.8 billion, so the latest forecast implies a slowdown.
This shouldn’t be a huge concern. As the company explained on a conference call with analysts, customers in fiscal 2021 and 2022 responded to shortages in things such as semiconductors by placing “unusually large advance orders,” leading to a multibillion-dollar backlog. Now that shortages are improving and old orders are being fulfilled, new orders are naturally subsiding. Crucially, though, the company’s third-quarter earnings presentation showed an expectation for orders to start growing again next fiscal year thanks to all the factors driving manufacturing investment in the U.S.
Now trading at 22.3 times forward earnings, according to FactSet, Rockwell isn’t exactly cheap. But that is actually a slight discount to its five-year average of 23.8 times, which seems odd given all the emerging trends in its favor.
Wall Street’s shortsightedness could prove to be investors’ gain.
