Over the past six months, Rockwell Automation has been a great trade, beating the S&P 500 by 15.3%. Its stock price has climbed to $493.30, representing a healthy 23.8% increase. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
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Why Is Rockwell Automation Not Exciting?
We’re happy investors have made money, but we’re sitting this one out for now. Here are three reasons you should be careful with ROK, plus one stock we’d rather own.
1. Core Business Falling Behind as Demand Plateaus
Investors interested in Internet of Things companies should track organic revenue in addition to reported revenue. This metric gives visibility into Rockwell Automation’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Rockwell Automation failed to grow its organic revenue. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Rockwell Automation might have to lean into acquisitions to accelerate growth, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. Recent EPS Growth Below Our Standards
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Rockwell Automation’s EPS grew at an unimpressive 4.5% compounded annual growth rate over the last two years. On the bright side, this performance was higher than its flat revenue and tells us management responded to softer demand by adapting its cost structure.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
Over the last few years, Rockwell Automation’s ROIC averaged 4.5 percentage point decreases each year. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Rockwell Automation isn’t a terrible business, but it isn’t one of our picks. With its shares beating the market recently, the stock trades at 35.2× forward P/E (or $493.30 per share). This valuation tells us a lot of optimism is priced in - you can find more timely opportunities elsewhere. Let us point you toward the Amazon and PayPal of Latin America.
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