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Rosenblatt Downgrades Rockwell Automation Despite Huge Earnings Beat

April 29, 2020

Although Rockwell Automation ROK 0.57% reported strong earnings for its fiscal second quarter, significantly beating expectations, the conference call with management triggered concerns over the company’s performance in the next quarter and fiscal 2021, according to Rosenblatt Securities.

Scott Graham downgraded Rockwell Automation's stock from Neutral to Sell, while raising the price target from $155 to $173.

Following the call with management, Rockwell Automation seems to be headed for earnings declines over the next four quarters, Graham said in the note.

The company’s strong earnings in the quarter were driven by robust margins due to a meaningful decline in incentive comp. The guidance for the third quarter came in much below expectations “on a decremental margin which will exceed 50%,” the analyst wrote.

He added that the fiscal 2020 earnings guidance range of between $6.90 and $7.70 per share is very wide, considering only half the year is left, and suggests that management is “struggling with where earnings will land.”

Although the guidance incorporates $150 million in annualized cost savings, all the reductions are variable or discretionary, and none are structural, Graham pointed out.

He said Rockwell Automation’s earnings in fiscal 2021 will be hurt by “this year's largely variable and discretionary cost reductions.”

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