Rockwell (NYSE)

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Rockwell Automation (ROK, NYSE)

What comes first, the chicken or the egg? In econo-speak, let me translate that into should we be paying attention to demand or supply? Neither question has an answer. They do however point to the basics. We drive big SUV's, prefer gas to other fuels to make electricity and the suppliers get a little tough on the spigot, we end up with soaring energy demand and prices. A handful of creative engineers develop this thing called the World Wide Web and next you know, everyone wants to be connected. The point I am trying to make is that if you can spot a trend early enough, the demand will make sure you are rewarded properly. Given the failure most other forecast including broker research have had in guiding us through the disasters of the stock market, we need alternatives.

If you look at the usual fundamental measures like P/E ratio's, Price to Book or market capitalization of most stock markets, you will find that investors are still firmly enamored with technology. We are still hoping for a repeat of earlier corrections of the last decade when missing out meant losing out big moves in stocks like Nortel, Cisco and Microsoft. It could happen again, eventually but there are some serious problems in the sector. All of the problems translate into just one issue, that of demand being nowhere near what the expectations were. We have to find sectors in demand.

One area that is likely to gain considerable momentum over the next few years is automation. Shrinking workforce in the developed world (due to aging population), continuing focus on research and development in microprocessor technology and the push for productivity all points to automation as the next big thing. Surely, there is more to automation than a handful of robots zapping sparks on an assembly line. Like most other technologies that achieved prominence over the last 100 years, fascinating the ordinary consumer is what propels demand. That too has already started albeit still in its infancy. Sony Corp(SNE, NYSE) has a robot pet dog named Aibo that learns as it plays with you and Honda has a man-sized robot intended to look after menial chores for the elderly Japanese. Either of them is far from perfect as commercial products with wide appeal or affordability. But then, remember back in the 70's the only computer you could use was housed in a building bigger than your house. Now it sits on your desk. It is quite conceivable we will have automatic household appliances like the vacuum cleaner, floor mop and the lawn mower. You can in fact buy a robot lawn mower for $795 on the Internet. I haven't used it; so if it chews through your marigolds, please don't call me. The point being, this looks to me a demand waiting to be filled and in need of a breakthrough of the kind Steve Jobs brought to us with the Apple.

There are many companies and technologies, which either have already or will become the growth story of tomorrow. Let's say that you want to buy into this automation thing. Unfortunately this cake is not quite baked and the killer applications are yet to be developed. The best approach may be to put together a basket of stocks with significant stake in this emerging technology. There are leaders in the automation industry that would most likely play a key role in supplying the technology, parts and software when the application does surface. In addition to Sony and Honda, Rockwell(ROK, NYSE)is now in a purely automation business. They sold or split off other pieces of their business including their semiconductor arm (talk about good timing) and global avionics. Surprisingly only about seven stocks are followed by analysts (U.S., of course) and most of them are attracting a fairly timid rating. Rockwell is the chief in this category and is more of a value stock than growth with a Market Capitalization of $3B, Price/Book 1.8 and Price/Sales 0.6. For the nine months ended 6/30/01, revenues fell 6% to $3.32 billion. Net income from continuing operations fell 60% to $113 million. Results reflect a slowdown in the economy. Closer to home CRS Robotics (ROB,TSE) is a niche player and ATS Automation serves (ATA,TSE) the automotive and pharmaceutical automation. To top it all, most of these stocks are either trading at 52 week lows or at fairly reasonable valuation. Rockwell even pays a 4.5% dividend. Imagine the next big thing with a dividend?

Charts:

The P/E chart shows full value at 19 times earnings per share which makes current 17 an undervalued situation. Not many high tech firms are selling at a discount to market P/E ratio these days.

Consensus estimate of $0.95 per share in Earnings for the next year means ROK could quite easily give you 30% return from here.


Following inputs were used to construct the charts;

Return on Equity 11%
Beta 1.09 
Earnings per Share $0.95 low, $1.05 High 
Plowback ratio 65%
Debt/Capital 20%

Last Updated July 29, 2000