April 27, 2023
ATS read-through
Key takeaways from Rockwell's FQ2 results
Our view: In this note, we highlight relevant read-throughs from Rockwell's FQ2 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 FQ2 results and revised 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 FQ2 results
In FQ2, Rockwell (not covered) generated revenue of $2,275MM (+25.8% YoY; +27.3% YoY on an organic basis) and Adjusted EPS of $3.01 (+81% YoY). By industry segment, Rockwell's FQ2 results reflected Discrete (~25% of FQ2 revenue), Hybrid (~45%), and Process (~30%) organic sales up ~20%, ~35%, and ~25% YoY, respectively. Most relevant to ATS, Rockwell reported YoY organic sales growth in Automotive, Food & Beverage, and Life Sciences of ~40%, ~40%, and ~20%, 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 +22.7% and +41.7% YoY, respectively (Latin America and Asia Pacific were +16.3% and +31.8%, 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 FQ2 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 +13%-17% (reflecting mid-teens growth in Q3 and high single-digit growth in Q4; vs. +11%-15% previously) and Adjusted EPS of $11.50-$12.20 (+25% YoY at the midpoint; vs. $10.70-$11.50 previously). Further, Rockwell expects $9B of orders in F2023 and expects to finish the fiscal year with a backlog of $5B (vs. $5.6B in FQ2 and $5.2B exiting F2022). Rockwell noted that its revised guidance (and results in the quarter) reflect the continued improvement in component availability (i.e., chip supply). As it relates to the outlook for a moderation in the company's backlog (which we note also reflects higher pricing), management noted that lead times are improving, meaning that the company is able to clear past due backlog; however, orders remain strong. Overall, we view the strong FQ2 results, increased guidance, and improving component availability positively as it relates to ATS as it indicates a continued strong demand backdrop and improving supply chain situation.
By industry segment, Rockwell is forecasting Discrete and Process organic sales to be up low-teens YoY in F2023, while Hybrid is expected to be up high-teens (vs. low-teens previously). Most relevant to ATS, Rockwell is expecting Food & Beverage to be up mid-teens (vs. low-teens previously), 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, driven by its defensive/less cyclical end-market exposure and evolving (higher-margin) business mix.