January 26, 2023
ATS read-through
Key takeaways from Rockwell's FQ1 results
Our view: In this note, we highlight relevant read-throughs from Rockwell's FQ1 results for ATS (we recently initiated on ATS – see link here). Given that Rockwell is a Component Supplier and is 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' suppliers accounted for more than 3.5% of its supplier spend). Overall, we view Rockwell's FQ1 results and F2023 outlook (both of which reflect a strong outlook for Automotive, Food & Beverage, and Life Sciences automation) as directionally positive for ATS.
Relevant commentary from Rockwell's FQ1 results
In FQ1, Rockwell (not covered) generated revenue of $1,981MM (+7% YoY; +10% YoY on an organic basis) and Adjusted EPS of $2.46 (+15% YoY). By industry segment, Rockwell's FQ1 results reflected Discrete (~25% of F2022 revenue) and Hybrid (~40%) organic sales up low-teens YoY, and Process (~35%) organic sales up mid single-digits YoY. Most relevant to ATS, Rockwell reported YoY organic sales growth in Automotive, Food & Beverage, and Life Sciences of ~25%, ~15%, and mid-single digits, respectively. Overall, we believe Rockwell's results, which point to continued strong end-user demand for automation solutions, offer a directionally positive read-through to ATS (recall that the Transportation, Life Sciences, and Food & Beverage end-markets accounted for ~83% of ATS' revenue in F2022).
Further, Rockwell's YoY organic sales growth in North America and EMEA was +8% and +13%, respectively (Latin America and Asia Pacific were also +6% and +16%, respectively). We also view this broad-based demand across regions for Rockwell's products as a directional positive for ATS (recall that North America and Europe contributed to ~86% of ATS' F2022 sales).
In conjunction with FQ1 reporting, Rockwell updated its F2023 guidance, which included upward revisions to sales growth and EPS. The company is now forecasting F2023 YoY organic sales growth of +10%-14% (vs. +7.5%-11.5% previously) and Adjusted EPS of $10.70-$11.50 (vs. $10.20-$11.00 previously). Further, Rockwell expects to finish F2023 with a backlog well above "traditional levels", driven by strong underlying demand (which we view as a directional positive for ATS). Despite the revised guidance, Rockwell continues to experience elevated lead times for the majority of its product offerings, while noting that the supply chain shortages for chips are improving. We see this as a modestly negative read-through for ATS which itself has been impacted by supply chain disruptions (though we highlight that as a mitigating factor, ATS is able to "design out" suppliers who are themselves experiencing supply chain issues by sourcing alternative equipment in systems integration projects).
By industry segment, Rockwell is forecasting Discrete, Hybrid, and Process organic sales up low-teens YoY in F2023. Most relevant to ATS, Rockwell is expecting Food & Beverage and Life Sciences to be up low-teens YoY, and Automotive to be up high-teens YoY. See Exhibit 1 inside for more details. In our view, Rockwell's revision to its F2023 outlook (particularly for the end-markets that are most relevant to ATS) provides a positive read-through for ATS over the next year as it suggests that end-user demand for automation remains strong despite the uncertain macro backdrop. Overall, we reiterate our thesis that ATS is well positioned to deliver strong top-line growth and margin improvement over the medium-term, driven by its defensive/less cyclical end-market exposure and evolving (higher-margin) business mix.