Our view: In this note, we highlight relevant read-throughs for ATS from Rockwell’s FQ3 results. Given that Rockwell is a Component Supplier and higher up the Automation value chain relative to System Integrators/OEMs (i.e., Rockwell supplies parts/equipment to companies such as ATS), we view the company’s results as providing only a directional indication of demand trends in end- markets and regions that are relevant to ATS (recall that in F2022, none of ATS’s suppliers accounted for more than 3.5% of its supplier spend). Overall, we view Rockwell’s FQ3 results and revised F2023 outlook as neutral for ATS.
Relevant commentary from Rockwell’s FQ3 results
In FQ3, Rockwell (ROK; not covered) generated revenue of $2,238.7MM (+13.7% YoY, +13.2% YoY on an organic basis; vs. consensus of $2,335.0MM) and Adjusted EPS of $3.01 (+13.2% YoY; vs. consensus of $3.18). By industry segment, Rockwell’s FQ3 results reflected Discrete (~25% of FQ3 revenue), Hybrid (~45%), and Process (~30%) organic sales up ~10%, ~15%, and ~15% YoY, respectively. Most relevant to ATS, Rockwell reported YoY organic sales growth in Automotive, Food & Beverage, and Life Sciences of mid-teens, mid-teens, and mid-single digits, respectively. Recall that the Transportation, Life Sciences, and Food & Beverage end- markets accounted for ~83% of ATS’s revenue in F2022. Rockwell’s YoY organic sales growth in North America and EMEA was +1.7% and +33.9% YoY, respectively (Latin America and Asia Pacific were +6.7% and +44.4%, respectively). Recall that North America and Europe contributed to ~86% of ATS’s F2022 sales. Overall, we believe Rockwell’s results and updated F2023 outlook (further details below) offer a neutral read-through for ATS, as they point to continued strong end-user demand for automation solutions.
In conjunction with FQ3 reporting, Rockwell tightened its F2023 guidance ranges, which are now: 1) F2023 YoY organic sales growth of +14–16% (vs. +13–17% previously); and, 2) Adjusted EPS of $11.70–12.10 (vs. $11.50–12.20 previously). Additionally, Rockwell expects $8.5–9.0B of orders in F2023 (vs. $9.0B previously) and to finish the fiscal year with a backlog of $4.5–5.0B (vs. $5.0B previously). On the earnings call, Rockwell noted that its revised guidance and results in the quarter reflect improving lead times causing decreased order sizing, particularly from “machine builders” (i.e., customers do not need to get ahead of potential supply chain disruptions to the same extent now). As it relates to the outlook for a moderation in the company’s backlog, management noted that improved lead times mean that the company is able to clear past due backlog; however, orders remain strong (particularly in North America). Overall, we view the continuation of the improving supply chain situation as directionally positive for ATS.
By industry segment, Rockwell forecasts Discrete organic sales to be up low-double digits YoY in F2023 (vs. up low-teens previously), while Hybrid is expected to be up high-teens (unchanged), and Process is expected to be up mid-teens (vs. low-teens previously). Most relevant to ATS, Rockwell expects Food & Beverage to be up mid-teens (unchanged), Life Sciences up high-single digits YoY (vs. low-teens previously), and Automotive up “strong” double digits YoY (vs. high-teens previously). See Exhibit 1 inside for more details. Overall, we expect ATS’s sizeable backlog to support revenue growth over the near to medium term, while easing of inflationary pressures should also support improve margins into next year. The strong balance sheet position (particularly following the recent U.S. IPO) also provides the company with ample optionality for M&A.