Rockwell Earnings: Weaker-Than-Expected Quarter More a Function of Normalizing Order Trends

We see no reason to change our $310 fair value estimate following wide-moat Rockwell’s ROK fiscal third-quarter results. Results were below expectations on the top and bottom lines, but income-related guidance was unchanged. Consequently, our sales and operating margin expectations were relatively unchanged, though cash conversion was a good deal south of what we previously earmarked.

We now expect free cash flow conversion of 80% for full-year 2023, mostly due to higher levels of inventory that Rockwell is carrying. That said, Rockwell is also collecting receivables a bit slower and addressing payables a bit quicker than we previously penciled in. However, time value of money more than offset these cash headwinds.

Revenue rose to $2.24 billion during the quarter, up 13% organically, while segment operating margins rose 30 basis points to 21.1%. Rockwell’s software and control business led the way on both a revenue and margin basis. Its organic revenue rose 24%, while its operating margins increased 340 basis points to 34.8%. Software and control was also the only business that came relatively in line with our prior expectations.

We’re not overly concerned about these dynamics, as we consider them more a function of deceleration from peak order trends that are now normalizing. We think Rockwell’s commentary about machine builders not needing as many months of “usually large advanced” product orders is particularly instructive. Unsurprisingly, Rockwell is beginning to reduce its backlog as its lead times improve, much like many of the other manufacturers in our U.S. multi-industry coverage.