BUY
Rockwell Automation, Inc.
Ticker: ROK Sector: Industrials Industry: Elec. Cmpt. & Equip. March 3, 2008 Financial Highlights: Market Cap: $8 BB Annual Sales: $5 BB 2007 EPS: $3.53 2008(E) EPS: $4.35 Dividend Yield: 2.0% SIM Analyst: Stephen Soung Contact: 412.498.5354 soung.1@osu.edu Course: BUS‐FIN 824 Target Price: $68.33 Current Price: $54.49 Company Highlights__________________________ Rockwell Automation is a company devoted to the improvement of manufacturing by providing industrial automation power, control and information solutions. Last year, their Power Systems operating segment was sold to help enhance their transition from a U.S. based hardware company to a global technology leader in automation solutions and services. Annual revenues increased 10% and EPS jumped 20% in 2007. Of the $5 billion in revenues, 46% were generated in emerging international markets. Rockwell’s operating margin increased to 20% and the company generated $531 million of free cash flow from continuing operations. Investment Outlook__________________________ ROK and its management team aim to grow revenues 10 to 12% in 2008. This growth will be driven by strategic acquisitions, growth in their services and solutions business, and continued return from their investments made in emerging global markets. Earnings in 2008 are projected to fall between $4.25 and $4.45 per share. The divestiture of the Power Systems segment increased cash to $1.4 billion in 2007, which will enhance ROK’s ability to invest in organic growth and strategic acquisitions, accelerate cost productivity initiatives, and increase free cash flow. Ratio valuations show that ROK is currently undervalued relative to the Industrials sector and the Electrical Component & Equipment sub‐sector. Rockwell’s strong financial condition and undervalued valuation make ROK an attractive investment. SIM Manager: Royce West, CFA Fisher College of Business The Ohio State University Columbus, OH Table of Contents 1.
2.
3.
4.
5.
6.
7.
8.
9.
Company Overview ___________________________________________________________ 3 I.
Business Segments and Products 3 Macroeconomic Analysis _______________________________________________________ 5 I.
U.S. Indicators 5 II.
Non‐U.S. Indicators 8 Sector Analysis _______________________________________________________________ 9 I.
Sector Valuation 9 II.
Sector Performance Factors 10 Sub‐sector/Industry Analysis ___________________________________________________ 11 11 I.
Sub‐sector Comparison II.
Electrical Components and Equipment Outlook 11 Company Analysis ____________________________________________________________ 12 I.
Financial Analysis 12 II.
Business Segment Analysis 13 III.
Rockwell Performance Factors 13 Company Valuation ___________________________________________________________ 15 I.
Discounted Cash Flow Model 15 II.
Valuation Analysis 16 III.
DuPont Analysis 19 19 IV.
Comparables Analysis Conclusions and Recommendation ______________________________________________ 22 References _________________________________________________________________ 23 Appendices A. ROK Income Statement B. ROK Balance Sheet C. ROK Cash Flow Statement D. ROK DCF Model E. ROK DCF Model (Income Statement by Segment) F. ROK DCF Model (Income Statement – Part 1) G. ROK DCF Model (Income Statement – Part 2) Page 2 of 31 1. Company Overview Rockwell Automation, Inc. (ROK) is a company devoted to improving manufacturing efficiency by providing industrial automation power, control and information solutions. They are the world’s largest “pure play” industrial automation company with a market cap over $8 billion and annual sales topping $5 billion. Rockwell makes its major markets in food and beverage, automotive, water/wastewater, oil and gas, and home and personal care. Employing roughly 20,000 people and serving customers in more than 80 countries, Rockwell is truly an international corporation. Rockwell Automation makes its global headquarters in Milwaukee, Wisconsin. In 2007, ROK sold their Power Systems operating segment for an after‐tax gain of $868.2 million. After the sale of Power Systems, Rockwell restructured into two new operating segments: the Architecture & Software segment and the Control Products & Solutions segment. I. Business Segments and Products Architecture & Software (A&S) Architecture & Software (A&S) generated 44% of ROK’s total revenue in 2007. This segment has a complete portfolio of integrated control and information architecture for connecting a customer’s entire manufacturing operation. Products within this segment include: • A&S’s Integrated Architecture and Logix controllers. These devices perform multiple types of control and monitoring applications, including discrete, batch, and continuous process, drive system, motion and machine safety, and supply real time information to plant‐wide information systems. • A&S’s Other Products include: control platforms, software, I/O devices, communication networks, high performance rotary and linear motion control systems, condition based monitoring systems, industrial computers and machine safety components. (1) Headquartered in Mayfield Heights, Ohio, the A&S segment operates in North America, Europe, Middle East, Africa, Asia‐Pacific and Latin America. The major competitors of the Architecture & Software operating segment are Emerson Electric Co, Mitsubishi Corporation, Omron Corporation and Siemens AG. (1) Control Products & Solutions (CP&S) Control Products & Solutions (CP&S) generated the other 56% of 2007 sales by providing intelligent motor control and industrial control products along with the customer support and application knowledge for implementation. The portfolio of products offered by CP&S includes: Page 3 of 31 • Low and medium voltage electro‐mechanical and electronic motor starters, motor and circuit protection devices, AC/DC variable frequency drives, signaling devices and condition sensors. • Value‐added packaged solutions, including configured drives, motor control centers and custom engineered panels. • Automation and information solutions, including custom‐engineered hardware and software systems for discrete, process, motion, drives and manufacturing information applications. • Services designed to help maximize a customer’s automation and provide total life‐cycle support, including multi‐vendor customer technical support and repair, asset management, training and predictive and preventative maintenance. (1) Control Products & Solutions is headquartered in Milwaukee, Wisconsin and operates in North America, Europe, Middle East, Africa, Asia‐Pacific and Latin America. The major competitors of the CP&S operating segment are ABB Ltd, Eaton Corporation, Emerson Electric Co, General Electric, Honeywell International, and Siemens AG. (1) Page 4 of 31 2. Macroeconomic Analysis In 2007, 54% of Rockwell’s sales were generated domestically while 46% of sales were generated outside of the U.S. Therefore, domestic and foreign economic indicators need to be considered. Three indicators used to meter the U.S. industrial markets are the Industrial Equipment Spending statistic, Capacity Utilization, and the Manufacturing Purchasing Managers’ Index. Foreign GDPs and Industrial Exports will be examined to determine the direction of non‐
domestic markets. I. U.S. Indicators Industrial Equipment Spending The Bureau of Economic Analysis (BEA) generates the Industrial Equipment Spending statistic. This statistic provides information about the spending of the U.S. industrial economy and can be used as a directional indicator for domestic growth. Figure 1 is a plot of domestic Industrial Equipment Spending, which shows that Industrial Equipment Spending is near an all time high. Figure 1: Industrial Equipment Spending in the U.S. (2) Capacity Utilization The Capacity Utilization figure is released by the Federal Reserve each month. This statistic covers manufacturing, mining, and electric and gas utilities and provides insight into the level of capital expenditures into the U.S. manufacturing base. Capacity Utilization is currently at 81.5%, which is 0.4% higher than a year ago. (3) The plot below shows Capacity Utilization levels over the past 4 years. Page 5 of 31 Figure 2: Capacity Utilization Percentages The Federal Reserve estimates total industrial capacity to rise 1.9% this year after (vs. 1.8 % in 2007) and manufacturing capacity to increase 2.1% in 2008 (same as 2007) (3). Both projections favor increased industrial output for the upcoming year. Manufacturing Purchasing Managers’ Index The final indicator used to gauge the U.S. manufacturing economy is the Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI). The chart below shows PMI values of the past 4 years. A PMI over 50% indicates a growing manufacturing economy. Conversely, a reading below 50% indicates a contracting economy. Page 6 of 31 Figure 3: ISM Purchasing Managers’ Index The PMI for January 2008 was 50.7%, which was a 2.3% increase over December’s PMI (48.4%). Based on historical PMI values its past correlation with the overall U.S. economy, January’s PMI of 50.7 corresponds to a 3% increase in annual real gross domestic product. (4) Also, a consistent PMI over 41.1 indicates expansion of the overall economy. (4) Therefore, PMI is indicating a growing domestic manufacturing economy. Page 7 of 31 II. Non‐U.S. Indicators Foreign GDP Emerging foreign markets are estimated to grow at 6‐6.5% in 2008. (5) China will lead foreign growth with a projected rate of 10.5%, which is similar to historical growth rates. Eastern Europe, Middle East and Africa (EMEA) look to grow at 6% while Latin America is estimated to grow 4%. (5) Rockwell has made commercial investments and has been steadily growing sales in each of these emerging markets. The chart below shows GDP rates for emerging markets. Figure 4: Emerging Market Plot of Real GDP (5) Although foreign GDPs are projected to stabilize/slow in 2008, industrial exports from the U.S. have not slowed. Industrials Exports According to the January 2008 ISM report, New Export Orders increased 6% from December. This is the 62nd consecutive month of export order growth. The Electrical Equipment industry was one of the top industries reporting growth so far this year. (4) Page 8 of 31 3. Sector Analysis The Industrials sector is a mature sector with historical cyclicality. It has outperformed the S&P 500 over the past 5 years by 3.10% and has weathered the year‐to‐date economic uncertainty better than the 500 index. With the slowing U.S. economy, sales derived internationally will be more important. Over 40% of the Industrials sector revenues are generated overseas. In addition to having a global presence, the sector has increased revenues from higher‐margin, aftermarket services, which will help decrease cyclicality in the sector. (6) I. Sector Valuation The consensus growth rate for the S&P500 Composite is 12% with a 4% standard deviation. The consensus growth rate for the S&P Industrials Sector Composite is 12% with a 3% standard deviation. The table below displays how the Industrials Sector (SP‐20) is performing from a ratio valuation standpoint relative to the S&P 500. SP‐20 Relative to SP500 High Low Mean Current Δ % from Mean P/Forward E 1.17 0.8 1.01 1.02 1.0% P/S 1.12 0.68 0.94 1.02 8.5% P/B 1.27 0.79 1.05 1.18 12.4% P/EBITDA 1.41 0.99 1.19 1.17 ‐1.7% P/CF 1.36 0.78 1.05 1.27 21.0% P/E/G ratio 1.22 0.95 1.09 1.03 ‐5.5% ROE 1.24 0.94 1.03 1.18 14.6% Table 1: Industrials Sector Ratios Relative to S&P 500 From the sector valuation table above, the Industrials sector seems to be trading at a slight premium to the S&P. This slight premium may be warranted since the industrials sector has the same growth rate as the S&P, but a lower variance (Std Dev of 3% vs. 4% for S&P500). Also, the fact that the sector has increased revenues from higher‐margin, aftermarket services has contributed to a higher premium in the sector. The only two valuation values that are discounted are the P/EBITDA and PEG ratios. Page 9 of 31 II. Sector Performance Factors The Industrials Sector is closely correlated to industrial and manufacturing indicators. The most comprehensive indicator is the Industrial Production Index (IPI) . Figure 5: Charts Comparing Industrial Production Index and SP‐20 Price (7) It is clear that the sector is highly correlated with the IPI. If a recession were to surface, the IPI would likely decrease which would negatively affect the sector’s performance (notice slowdown in 2001 and 2002). Although IPI is correlated with the sector, those companies with a larger global footprint should not be affected as much by a domestic slowdown. Although economists have been warning of a U.S. recession, the Industrial Production Index has been increasing for the past quarter. In January, the IPI was at 114.2, which is up 0.7 since October 2007. (3) This is a positive indicator for the Industrials Sector. Page 10 of 31 4. Sub‐sector Analysis I. Sub‐sector Valuation The Electrical Components and Equipment sub‐sector (EC&E) has had a very strong performance since 2002. The chart below shows the sub‐sector’s price movements and its movement relative to the Industrials sector. Figure 6: Chart of Electrical Component and Equipment Sub‐sector (7) The industry is currently trading at a premium to SP‐20, near its 10‐year high, and may be slightly overpriced. This premium is partially warranted due to the higher growth rates seen in the industry (8.5%) over other sub‐sectors in the past 10 years. For instance, growth rates for Air Freight and Logistics, Industrial Machinery, and Industrial Conglomerates are 6.1%, 5.8%, and 2.6%, respectively. (7) The Electrical Component and Equipment industry has also outperformed the overall Industrials sector in the past 10 years (8.5% vs. 4.9%). II. Electrical Components and Equipment Industry Outlook EC&E had EPS growth of 20% in 2006 and is projected to have finished with an EPS growth of 32% in 2007. (8) Although the industry is projected to slow compared to the growth experience in the previous two years, the sub‐sector should still outperform the overall market. Also, the Institute of Supply Chain Management found that the Electrical Equipment & Components industry was the fourth fastest growing industry in January 2008. (4) This is a positive start for the industry in an uncertain market environment. Page 11 of 31 5. Company Analysis I. Financial Analysis With the sale of their Power Systems operating segment, Rockwell Automation ended 2007 with a large amount ofcash and a healthy financial situation for the upcoming year. Some of the financial highlights from last year included: • Sales increased 10% to just over $5 billion. Domestic sales only increased 3% while sales in EMEA, Asia‐Pacific, and Latin America had double digit growth (27%, 13%, and 23%, respectively). (1) • Operating margins were also improved to almost 20%. This yielded a diluted EPS of $3.70, up 29% year‐over‐year. • Free cash flow derived from continuing operations was approximately 93% of continuing operations’ income, which demonstrated high quality earnings. • Cost productivity target of 4% was achieved. • 23.8 million shares of common stock were repurchased. Rockwell Automation and its management have done a solid job at consistently increasing sales, earnings, EPS, return on equity, and the dividend over the past five years. The table below helps to illustrate this point. 2007 2006 2005 2004 2003 Revenues ($ Mil) 5003.9 4556.4 4111.5 3644 3266.3 Net Income Adjusted ($ Mil) 585 529.3 447.7 324.1 217.3 EPS Adjusted 3.63 2.94 2.39 1.7 1.14 Dividends Common (Per Shr) 1.16 0.9 0.78 0.66 0.66 ROE 32% 30% 26% 19% 14% Table 2: Rockwell Financial Highlights since 2003 (For complete Financial Statements, please see the Appendix) Page 12 of 31 Rockwell management is focused on consistently generating cash, investing in organic growth and strategic acquisitions, and returning excess income to shareholders through dividends and share buybacks. From the table above, it is clear that Rockwell has been succeeding in this mission and this objective looks to continue. Rockwell’s revenue is estimated to grow 10 to 12 percent in 2008. This growth will be fueled by strategic acquisitions, growth in their services and solutions business, and continued return from their investments in emerging markets. Diluted earnings for 2008 are projected to fall between $4.25 and $4.45 per share driven by productivity initiatives, share repurchase, and volume leverage. A target free cash flow of 95 percent has also been set for this year. Finally, Rockwell’s Board of Directors authorized $1.0 billion for additional repurchase of common stock in November of last year. II. Business Segment Analysis Architecture & Software (A&S) A&S increased sales in 2007 by 8% from $2.06 billion in 2006 to $2.22 billion in 2007. This increase was attributed to growth in process applications, safety and Rockwell’s Compact Logix product. Earnings for the segment increased 10% to $588 million. The segment operating margin increase 0.6 points from 25.9% in ’06 to 26.5% in ’07 due in part to cost productivity initiatives and price increases. Control Products & Solutions (CP&S) CP&S had double‐digit revenue growth at 11% to bring 2007 sales to $2.78 billion. Sales growth was driven by the power‐centric and solutions businesses. Operating earnings for the segment also increased significantly (~17%) for a 2007 total of $397 million. The segment’s operating margin also benefitted from cost productivity increasing from 13.6% in 2006 to 14.3% in 2007. III. Rockwell Performance Factors As with any business, risks and growth drivers surround Rockwell and its management. If management minimizes risk and executes on drivers of growth, significant returns can be generated. Below are some of the risks and catalysts for Rockwell Automation. Risks • Inability to capture market share in emerging markets, specifically in China, EMEA, and Latin America will lead to lower revenues and earnings Page 13 of 31 •
Failure to provide customers with advanced technology products and solutions – due to the highly competitive nature of the industrial automation power, control and information business, failure to keep pace with technology can lead to price erosion and lower margins • Cost productivity not being executed will lead to lower margins and decreased earnings • Raw material inflation could decrease margins • Underperformance of new IT structure using Enterprise Resource Planning (ERP) system could adversely affect operations • Acquisition difficulties could occur, such as: o difficulties in integrating the acquired business, retaining the acquired business’ customers, and achieving o the expected benefits of the acquisition, such as revenue increases, cost savings and increases in geographic or product presence, in the desired time frames; o loss of key employees of the acquired business; o difficulties implementing and maintaining consistent standards, controls, procedures, policies and information systems; and o diversion of management’s attention from other business concerns. (1) Growth Drivers The previously stated risks can also be major growth catalysts if executed on correctly. • Ability to penetrate emerging markets and generate returns on commercial investments abroad • Successful anticipation, development, and distribution of industrial automation products and solutions to market • Successful execution of cost productivity initiatives • Smooth implementation of new ERP system will lead to more efficient and streamlined operations • Excess cash from Power Systems sale could be used for reinvestment in organic growth or strategic acquisitions • Successful integration/implementation of acquisitions and partnerships to fill in competency gaps in current technology portfolio. Examples of successful acquisitions by Rockwell Automations were:
o Acquisition of ICS Triplex – added critical control and safety solutions for the oil and gas, chemical and power generation industries. o Acquisition of ProsCon Holdings Limited – enhanced position in the growing life sciences industry as a leading solutions delivery company (1) Page 14 of 31 6. Company Valuation Multiple methods were employed to estimate the current value of Rockwell Automation. A Discounted Cash Flow model was generated and then financial ratios were used to valuate the company. I. Discounted Cash Flow (DCF) Model The discounted cash flow model yields a target price of $64.70 for Rockwell. The estimated diluted EPS for 2008 is $4.39 and $4.78 for 2009. This price target is based on the following model assumptions: • Effective Tax rate set at 29% • Terminal Discount Rate set at 10% • Terminal FCF Growth Rate set at 5% • Capital Expenditures equal Depreciation and Amortization over time • 10‐12% increase in Revenues in 2008, in‐line with ROK management guidance • Free Cash Flow set at 95% of Net Income, in‐line with ROK management guidance • Outstanding Shares of Common Stock reduced to 151 MM from 161.2 MM using 50% of authorized $1 BB funds for stock repurchase The detailed DCF model can be found in the Appendix. A sensitivity analysis was conducted to determine the effects of the terminal discount rate and FCF growth rate on the target price. Target
Price ($)
2
Terminal
Discount
Rate
8.0
9.0
9.5
10.0
10.5
11.0
12.0
13.0
50.30
Terminal FCF Growth Rate
4
5
106.95
80.50
71.72
64.70
53.73
58.30
58.97
54.21
46.74
41.15
3
6
7
74.30
90.31
Table 3: DCF Sensitivity Study – Target Price for ROK Page 15 of 31 Change
from Current
Price (%)
2
Terminal
Discount
Rate
8.0
9.0
9.5
10.0
10.5
11.0
12.0
13.0
-7.7%
Terminal FCF Growth Rate
4
5
96.3%
47.7%
31.6%
-1.4%
7.0%
18.7%
8.2%
-0.5%
-14.2%
-24.5%
3
6
7
36.4%
65.7%
Table 4: DCF Sensitivity Study – Change from Current ROK Price The two tables above demonstrate the impact that a 0.5% change in terminal rate can have on the DCF target price. Notice that even with a full percentage increase in terminal discount rate would yield a target price equal to the current market price. Similarly, the terminal free cash flow growth rate could be decreased over 1% and result in a target price equal to the current market price. Each of these terminal rates would be very conservative for Rockwell. II. Valuation Analysis The second method of valuation compared historical 10‐year financial ratios to current values. The table below shows the 10‐year high, low, mean and current financial ratio values for Rockwell on an absolute scale. Absolute
Valuation
High
Low
Mean
Current
Δ% from
Mean
Target E, S, B,
etc/Share
Target
Price
P/Forward E
99.9
12.1
19.9
13
-35%
4.50
$ 89.47
P/EBITDA
99.9
8.4
11.6
9
-22%
6.49
$ 75.34
P/S
3.28
0.52
1.99
1.75
-12%
33.40
$ 66.47
P/B
8.4
1.4
3.7
4.9
32%
11.93
$ 44.14
P/E/G ratio
2.4
0.7
1.3
0.9
-31%
64.94
$ 84.43
Table 5: Historical 10‐year Absolute Valuations for ROK Page 16 of 31 The target price seen in the table above was calculated using a reversion‐to‐the‐mean assumption. Estimated target prices were calculated using the following equation. The average of all the target prices using the 10‐year mean is $71.97. This target price is over 11% higher than the discounted cash flow model estimate. ROK is currently discounted when compared to 10‐yr historical levels. It is trading at 12‐35% below historical valuation averages (except for P/B). These valuation levels seem to indicate that ROK may be currently undervalued. Ratio valuation relative to the Industrials sector (SP‐20) was also used. The table below displays the high, low, mean, and current Rockwell financial ratios versus SP‐20 over the past 10‐years. ROK vs. SP-20
Valuation
High
Low
Mean
Current
Δ% from
Mean
P/Forward E
3.96
0.68
1.1
0.87
-20.9%
P/EBITDA
99.9
1.06
1.35
1.06
-21.5%
P/S
2
0.36
1.22
1.21
-0.8%
P/B
2.56
0.39
0.91
1.55
70.3%
P/E/G ratio
1.63
0.47
0.92
0.78
-15.2%
Table 6: Historical 10‐year Relative Valuations of ROK vs. SP‐20 The relative valuations also show that ROK is currently trading at a discount to the Industrials sector (except P/B). Based on the strong financial condition and increasing global reach of Rockwell Automation, ROK should be trading at least in line or at a slight premium to the Industrials sector. In addition to trading at a discount to the Industrials sector, Rockwell is also trading at a discount to the Electrical Components and Equipment sub‐sector. Page 17 of 31 ROCKWELL AUTOMATION INCORPORATED (ROK) Price 54.71
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
StockVal®
2009
2010
1.0
HI
LO
ME
CU
0.7
0.5
0.4
1.00
0.21
0.48
0.40
0.3
02-27-1998
02-29-2008
0.2
PRICE RELATIVE TO S&P ELECTRICAL COMPNT & EQPT (S20D1)
2.1
1.8
HI
LO
ME
CU
1.5
1.2
1.85 •
0.53
1.06
0.73
0.9
0.6
07-03-1998
02-29-2008
0.3
PRICE / YEAR-FORWARD EARNINGS RELATIVE TO S&P ELECTRICAL COMPNT & EQPT (S20D1)
1.8
1.5
HI
LO
ME
CU
1.2
0.9
0.6
1.67 •
0.45
1.14
0.96
07-02-1999
02-29-2008
0.3
PRICE / SALES RELATIVE TO S&P ELECTRICAL COMPNT & EQPT (S20D1)
Figure 7: Rockwell Ratios Relative to EC&E Sub‐sector ROK is trading below the 10‐year mean in price, price to forward earnings, and P/S to the EC&E sub‐sector. Again, since Rockwell is in such as strong financial position and has excess cash to invest in growth, ROK should be trading at least in line with the sub‐sector. If this holds true, then ROK stands to return substantial gains in the next few years. Page 18 of 31 III. DuPont Analysis DuPont Analysis was conducted on ROK to examine the quality of earnings. The table below presents the breakdown of return on equity (ROE) over the past five years for ROK. 2007 2006 2005 2004 2003 EBIT MARGIN% 17% 17% 16% 13% 11% INT BURDEN 93% 93% 93% 91% 85% TAX BURDEN% 72% 72% 71% 81% 95% ASSET T/O 1.08 0.98 0.94 0.90 0.83 LEVERAGE 2.54 2.60 2.49 2.36 2.47 ROE 32% 30% 26% 19% 14% % ROE from OPERATIONS 39% 39% 40% 42% 40% Table 7: DuPont Analysis of ROK for Past Five Years Margins, ROE and asset turnover have been consistently increasing over the past five years. More importantly, as ROE has more than doubled in the past five years, management has been able to maintain high quality ROE by keeping about 40% of ROE derived from operations. From this DuPont Analysis, it is clear that Rockwell management has been effective at executing the business plan and increasing the overall financial health of the company. IV. Comparables Analysis Since the industrial automation and power business is highly competitive, it would be prudent to evaluate Rockwell against its competitors. The table below looks at the historical 10‐year absolute valuations of Rockwell and three of its competitors: ABB Ltd (ABB), Emerson Electric (EMR), and Siemens AG (SI). Page 19 of 31 SI EMR ABB ROK Absolute
Valuation
High
Low
Mean
Current
Δ% from
Mean
Sentiment
P/Forward E
99.9
12.1
19.9
13
‐35% CHEAP P/EBITDA
99.9
8.4
11.6
9
‐22% CHEAP P/S
3.28
0.52
1.99
1.75
‐12% CHEAP P/B
8.4
1.4
3.7
4.9
32% EXPENSIVE P/E/G ratio
2.4
0.7
1.3
0.9
‐31% CHEAP P/Forward E
99.9
11.2
15.9
16.1
1% IN‐LINE P/EBITDA
16
1.3
7.7
12.2
58% EXPENSIVE P/S
2.56
0.08
0.61
2.05
236% EXPENSIVE P/B
8
0.8
4.7
5.5
17% EXPENSIVE P/E/G ratio
2.8
0.7
1.2
0.8
‐33% CHEAP P/Forward E
26.4
11
18.3
16.9
‐8% IN‐LINE P/EBITDA
13
6.5
10.1
10.2
1% IN‐LINE P/S
2.36
1.25
1.76
1.84
5% IN‐LINE P/B
5.3
2.9
4.1
4.6
12% EXPENSIVE P/E/G ratio
2.4
1.1
1.7
1.2
‐29% CHEAP P/Forward E
99.9
10.6
24.1
14.7
‐39% CHEAP P/EBITDA
13.7
3.3
6.5
10.6
63% EXPENSIVE P/S
2.4
0.35
0.88
1.26
43% EXPENSIVE P/B
7
1.2
2.4
2.6
8% IN‐LINE P/E/G ratio
4.8
0.6
1.9
0.7
‐63% CHEAP Table 8: Historical 10‐year Absolute Valuations for ROK and Competitors Page 20 of 31 Of the four companies, ROK is the only one that looks to be discounted to historical 10‐year valuations. ABB is currently trading at a significant premium and EMR and SI are in line/slightly expensive compared the 10‐year mean. These valuations demonstrate that Rockwell has the highest potential upside amongst its competitors from a ratio valuation standpoint. Page 21 of 31 7. Conclusions and Recommendation There are always two sides to an investment story. Therefore a list of pros and cons surrounding the investment decision in Rockwell Automation can be found below. Cons Pros 9 Effective Management – high quality of earnings, increasing margins, adding value for shareholders ¾ Past management performance does not guarantee future performance 9 Strong Financial Health – increasing revenues, earnings, and free cash flow ¾ Industrials sector trading at a slight premium to the S&P 500 9 Excess Free Cash for Investment into Organic Growth or Strategic Acquisitions ¾ Industrials sector is cyclical in nature – slow down in U.S. economy could significantly affect the sector 9 Increasing Share in Emerging Markets – 46% of Revenues generated Internationally 9 Consistent Stock Repurchase Plan 9 Discounted Ratio Valuation on Absolute and Relative Scale to Industrials Sector and EC&E Sub‐sector 9 Currently trading at Discount Compared to Competitors The target price for Rockwell Automation, Inc. is $68.33. This price is based on the average of the DCF model price and the ratio valuation price. As of March 3, 2008, ROK was trading at $54.49. This provides a 25% upside and a BUY rating for ROK. Based on the solid performance of the current management team, the strong free cash flow and financial health of the company, and the current discount to the sector, Rockwell Automation is well positioned to outperform the market. Page 22 of 31 8. References I.
Rockwell Automation, Inc. 2007 Annual Report (10‐K) II.
Bureau of Economic Analysis. “Gross Domestic Product: Fourth Quarter 2007 Release. “ January 30, 2008. Accessed Feb 29, 2008. <http://www.bea.gov/newsreleases/national/gdp/2008/txt/gdp407a.txt> III.
Federal Reserve Statistical Release. “Industrial Production and Capacity Utilization Release.” February 15, 2008. Accessed Feb 29, 2008. <http://www.federalreserve.gov/Releases/g17/Current/> IV.
Institute for Supply Management. “January 2008 Manufacturing ISM Report On Business.” Accessed Feb 29, 2008. <http://www.ism.ws/ISMReport/MfgROB.cfm> V.
Berghaim, Stefan. “Global economic outlook 2008.” Deutsche Bank Research. February 14, 2008. VI.
Standard & Poor’s Equity Research. “2008 Sector Outlook: Industrials.” December 10, 2007. Accessed Feb 29, 2007. <http://www.businessweek.com/investor/content/dec2007/pi20071210_906973.htm> VII.
StockVal Security Analysis and Valuation Modeling Software. VIII.
Jaffe, Michael. “Rockwell Automation Stock Report: Sub‐Industry Outlook.” January 26, 2008. Page 23 of 31 9. Appendices Page 24 of 31 APPENDIX A: ROCKWELL INCOME STATEMENT INCOME STATEMENT Revenues ($ Mil) Cost of Goods & Services Gross Profit S G & A Expense R&D Expense EBITDA Depreciation & Amortization EBIT Interest Expense Pre‐Tax Income Taxes Net Income Reported ($ Mil) Net Income Adjusted EPS Reported EPS Adjusted Shares Outstanding (Thou) Dividends Common (Per Shr) Dividends Preferred ($ Mil) 2007 5003.9 2906.6 2097.3 1278.6 143.1 969.9 117.9 852 63.4 788.6 219.3 1487.8 585 9.23 3.63 161200 1.16 0 2006 4556.4 2656.4 1900 1141 148.5 909.8 117.4 792.4 56.6 735.8 206.5 607 529.3 3.37 2.94 179900 0.9 0 2005 4111.5 2448 1663.5 997.4 128 803.1 127.4 675.7 45.8 629.9 182.2 540 447.7 2.88 2.39 187200 0.78 0 2004 3644 2081.2 1562.8 1058.6 121.7 666.5 186.7 479.8 41.7 438.1 84 414.9 324.1 2.17 1.7 191100 0.66 0 2003 3266.3 1955 1311.3 967.7 121.6 540.7 190.6 350.1 52.5 297.6 16.2 286.4 217.3 1.51 1.14 190100 0.66 0 2002 3775.7 2589.7 1186 907.4 123.2 493 197.7 295.3 66.1 229.2 5.5 121.5 168.3 0.64 0.89 188800 0.66 0 2001 4134.8 2886.8 1248 1041 169 476.2 225 251.2 83.2 168 43 305 147.1 1.65 0.79 185300 0.93 0 2000 4493 2939 1554 1040 209 804.7 225 579.7 72.7 507 163 636 367.3 3.35 1.93 189900 1.02 0 1999 4670 3178 1492 1018 188 773 251 522 84 438 155 559 281 2.89 1.45 193600 1.02 0 Page 25 of 31 APPENDIX B: ROCKWELL BALANCE SHEET BALANCE SHEET Cash & Equivalents ($ Mil) Accounts Receivable Inventories Other Current Assets Total Current Assets Plant & Equipment Gross Accumulated Depreciation Plant & Equipment Net Other Long‐Term Assets Total Long‐Term Assets Total Assets Accounts Payable Short‐Term Debt Other Current Liabilities Total Current Liabilities Long‐Term Debt Deferred Income Taxes Other Long‐Term Liabilities Total Long‐Term Liabilities Total Liabilities Minority Interest Preferred Equity Common Equity Total Equity Total Liab & Equity 2007 624.2 927.7 504.7 325.4 2382 1665.1 1154.8 510.3 1653.5 2163.8 4545.8 498.5 521.4 724.6 1744.5 405.7 0 652.8 1058.5 2803 0 0 1742.8 1742.8 4545.8 2006 408.1 743.6 411.5 624.8 2188 1515.7 1047.2 468.5 2078.9 2547.4 4735.4 395.7 219.8 677.8 1293.3 748.2 75.5 700.2 1523.9 2817.2 0 0 1918.2 1918.2 4735.4 2005 463.6 799.6 569.9 353.4 2186.5 2179.6 1405.1 774.5 1564.1 2338.6 4525.1 388.5 1.2 551.2 940.8 748.2 0 1187 1935.2 2876 1649.1 1649.1 4525.1 2004 473.8 719.9 574.3 258.1 2026.1 2139.7 1335.2 804.5 1370.6 2175.1 4201.2 362.2 0.2 501.2 863.6 757.7 89.3 629.6 1476.6 2340.2 1861 1861 4201.2 2003 226.4 651.5 536.1 278 1692 2158.3 1241.2 917.1 1330.8 2247.9 3939.9 315.2 8.7 451.8 775.7 764 35.3 778.1 1577.4 2353.1 1586.8 1586.8 3939.9 2002 289 645 557 266 1757 2181 1193 988 1210.8 2198.8 3955.8 325 161.6 479 965.6 766.8 140 474.4 1381.2 2346.8 1609 1609 3955.8 2001 121 704 600 296 1721 2168 1093 1075 1247.7 2322.7 4043.7 346 10.4 499 855.4 909.3 209 469.5 1587.8 2443.2 1600.5 1600.5 4043.7 2000 170 737 610 936 2453 2254 1060 1194 1614 2808 5261 478 16.4 530 1024.4 910.6 199 457.8 1567.4 2591.8 2669.2 2669.2 5261 Page 26 of 31 APPENDIX C: ROCKWELL CASH FLOW STATEMENT CASH FLOW STATEMENT FREE CASH FLOW Net Cash From Operations Capital Expenditures Free Cash Flow Dividends Common ($ Mil) Free Cash Flow After Dividends 2007 2006 2005 2004 2003 2002 2001 2000 1999 444.9 131 313.9 187 126.9 313.3 122.3 191 161.9 29.1 548.3 102.7 445.6 146 299.6 596.9 98 498.9 126.1 372.8 419.9 107.6 312.3 125.5 186.8 461.9 99.6 362.3 124.6 237.7 335 157 178 172.3 5.7 645 217 428 193.7 234.3 760 250 510 197.5 312.5 ADJUSTED CASH FLOW Net Income Reported ($ Mil) Accounting Adjustment Net Income Adjusted Depreciation & Amortization Cash Flow Adjusted Capital Expenditures Free Cash Flow Adjusted Dividends Common ($ Mil) Free Cash Flow Adjusted After Divs 1487.8 ‐902.8 585 117.9 702.9 131 571.9 187 384.9 607 ‐77.7 529.3 117.4 646.7 122.3 524.4 161.9 362.5 540 ‐92.3 447.7 127.4 575.1 102.7 472.4 146 326.4 414.9 ‐90.8 324.1 186.7 510.8 98 412.8 126.1 286.7 286.4 ‐69.1 217.3 190.6 407.9 107.6 300.3 125.5 174.8 121.5 46.8 168.3 197.7 366 99.6 266.4 124.6 141.8 305 ‐157.9 147.1 225 372.1 157 215.1 172.3 42.8 636 ‐268.7 367.3 225 592.3 217 375.3 193.7 181.6 559 ‐278 281 251 532 250 282 197.5 84.5 CASH FLOW STATEMENT SUMMARY Net Cash From Operations Net Cash From Investing Net Cash From Financing Other Cash Flows Change In Cash & Equiv 444.9 1398.9 ‐1673.1 45.4 216.1 313.3 52.7 ‐556.1 139.2 ‐50.9 548.3 ‐96.3 ‐551.7 88.1 ‐11.6 596.9 ‐65.2 ‐312 27.7 247.4 419.9 ‐131.4 ‐335.3 ‐16 ‐62.8 461.9 ‐171 ‐97.4 ‐25.7 167.8 335 153 ‐197 ‐340 ‐49 645 ‐228 ‐677 94 ‐166 760 ‐324 ‐243 60 253 Page 27 of 31 APPENDIX D: ROCKWELL DCF MODEL Page 28 of 31 APPENDIX E: ROCKWELL DCF MODEL (INCOME STATEMENT BY SEGMENT) Page 29 of 31 APPENDIX F: ROCKWELL DCF MODEL (INCOME STATEMENT ‐ PART 1) Page 30 of 31 APPENDIX G: ROCKWELL DCF MODEL (INCOME STATEMENT ‐ PART 2) Page 31 of 31