Trade Alert: Adding a Tooling & Re-tooling position to the Select List
Key Points in This Alert:
- We are adding shares of Rockwell Automation (ROK) to the Tematica Investing Select List as part of our Tooling & Re-tooling investment theme with a $235 price target.
We are adding shares of Rockwell Automation (ROK) to the Tematica Investing Select List as part of our Tooling & Re-tooling investment theme with a $235 price target.
As a result of tax reform, the new tax rules allow companies over the next five years to immediately deduct the entire cost of equipment purchases compared to writing off only a portion of the cost in a single year. This earnings season we’ve started to hear from companies, like Boeing (BA) that are boosting capital spending plans and investing in product development as well as its factories. Based on these prospects as well as statistics for private fixed assets that reveal the average age of US factory stock is near 60 years old, the Association For Manufacturing Technology forecast U.S. orders of manufacturing equipment to rise 12% in 2018 up from an annual rate of 9% it forecasted this past November. Given the tax code changes, odds are this upgrade and expansion spending will span more than just 2018.
Rockwell Automation is a leader in industrial automation and information products that serve the automotive, textiles, food & beverage, infrastructure, personal care, oil & gas, life sciences, power generation, semiconductor and other industries. Roughly 55% of the company’s business is domestic in nature, with the balance spread across 79 other countries, which positions the company to take advantage of the improving global economy.
Over the last several months, ROK shares have been a strong performer, but over the last few weeks, they’ve drifted lower despite the upward revisions we are seeing in EPS expectations for both this year and next. Current Wall Street consensus expectations have the company delivering EPS of $7.78 per share this year, up 15% year over year, and climbing another 12% to $8.75 in 2019. Based on historic P/E multiples, I see upside in ROK shares to $235 vs. downside to $175. On a percentage that’s upside of 20% vs. downside of 11%. Factor in the company’s increasing dividend policy and the current dividend yield of 3.4%, and it tips the upside vs. downside into a more favorable position. With roughly $1.4 billion available under the company’s recently upsized share repurchase plan, the shares have a nice safety net as well, which means historic downside multiples may not be as applicable this time around.
In terms of catalyst to watch, I’ll be focusing on forecast updates from the Association for Manufacturing Technology, monthly industrial production and manufacturing capacity utilization data as well as aggregate capital spending forecasts for US companies.
- We are adding shares of Rockwell Automation (ROK) to the Tematica Investing Select List with a Buy rating as part of our Tooling & Re-tooling investment theme with a $235 price target.