The industrial sector has been facing various challenges over the past few months. Following Russia's invasion of Ukraine, supply chain concerns intensified on increasing economic sanctions against Russia. While the demand for industrial goods and services remains strong, supply chain constraints and labor shortages are increasing input costs. Furthermore, strict COVID-19 lockdowns in China might exacerbate global supply chain issues, exacerbating inflationary pressures in the coming months.
Amid lingering supply chain issues, inflation pressures, strict lockdown measures in China, and the Russia-Ukraine war, the companies are unable to meet the high demand for industrial goods. During the first quarter of 2022, many industrial goods companies have incurred severe losses and have cut their guidance for the year. The bearish sentiment surrounding the industrial sector is evident in Industrial Select Sector SPDR ETF's (XLI) 10.6% decline over the past six months.
Against this backdrop, we think the stocks of fundamentally weak industrial goods companies Rockwell Automation, Inc. (ROK) and Vestas Wind Systems A/S (VWDRY), which have cut their full-year guidance, are best avoided.
Rockwell Automation, Inc. (ROK)
ROK in Milwaukee, Wisc., offers industrial automation and digital transformation solutions in the U.S. and internationally. The company operates through three segments: Intelligent Devices; Software & Control; and Lifecycle Services. ROK provides hardware and software products and services, network and security infrastructure solutions, and consulting and professional services. It serves discrete end markets, including automotive, warehousing and logistics, semiconductor, and other discrete markets.
In its fiscal 2022 second quarter, ended March 31, 2022, ROK's sales from the Intelligent Devices segment decreased 4.9% year-over-year to $808.60 million, while its gross profit declined 13.5% year-over-year to $664.10 million. Its selling, general and administrative expenses for the second quarter amounted to $428.50 million. In addition, the company's net income and adjusted EPS amounted to $49.40 million and $1.66, respectively, registering a decline of 88% and 31.1%, respectively, from the prior-year period.
Amid worsening global supply chain constraints due to pressures from COVID-19 related lockdowns in China and war between Russia and Ukraine, ROK updated its fiscal 2022 guidance. For its fiscal year 2022, ROK now expects reported sales growth between 11% and 15%, compared to the company's prior guidance of 16% to 19%. Its organic sales growth is now expected to be between 10% and 14%, down from the prior guidance range of 14% and 17%. In addition, ROK expects its adjusted EPS to be between $9.20 and $9.80 compared to prior guidance of $10.50 to $11.10.
The consensus EPS estimate of $9.33 for fiscal 2022 ending Sept. 30, 2022, represents a marginal year-over-year decline from the prior year. The stock has plunged 36.1% over the past six months and 20.8% over the past year. It closed Friday's trading session at $214.51. ROK's year-to-date decline translates to 36.9%.
ROK's POWR Ratings are consistent with this bleak outlook. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting. ROK has an F grade for Sentiment and a D grade for Growth and Value.
Within the Industrial - Machinery industry, it is ranked #68 of 77 stocks. To see ROK's POWR Ratings for Momentum, Stability, and Quality, click here.
Vestas Wind Systems A/S (VWDRY)
Headquartered in Aarhus, Denmark, VWDRY designs, manufactures, and installs wind turbines worldwide. The company operates in two segments: Power Solutions; and Service. Its Power Solutions segment sells wind turbines, power plants, and development sites. The Service segment sells service contracts, spare parts, and other related services.
VWDRY's gross profit decreased 88.4% year-over-year to €22 million ($23.19 million) in its fiscal 2022 first quarter, ended March 31, 2022. The company's EBITDA declined 115.6% year-over-year to negative €20 million ($21.08 million). The company's operating loss rose 1,046.2% year-over-year to €894 million ($942.48 million). In addition, its loss before taxes increased 958.3% year-over-year to €889 million ($937.21 million), and its loss for the period grew 1,095.3% from its year-ago value to €765 million ($806.49 million).
After announcing write-downs on its Russian and Ukraine business, Chinese lockdowns, and hefty impairment losses on legacy offshore activities, VWDRY cut its guidance. For its fiscal 2022, VWDRY expects an EBIT margin between zero and negative 5%, down from a previously announced range of zero and 4%. It expects its sales to range between €14.50 billion ($15.29 billion) and €16 billion ($16.87 billion),compared to the previous guidance range of €15 billion ($15.81 billion) and €16.50 billion ($17.39 billion).
The Street expects VWDRY's revenue to amount to $5.02 billion for its fiscal 2022 third-quarter, ending Sept. 30, 2022, representing a 21.9% decline from the prior-year period. Analysts expect the company's loss per share to amount to $0.03 for the second quarter, ending June 30, 2022.
The stock has decreased 23.5% in price year-to-date and 40.1% over the past year. It closed Friday's trading session at $7.67.
VWDRY's POWR Ratings reflect its weak prospects. The company has an overall rating of D, which translates to Sell in our proprietary rating system.
VWDRY has a D grade for Growth, Momentum, Sentiment, and Quality. It is ranked #37 of 44 stocks in the Technology - Hardware industry. To see additional POWR Ratings (Stability and Value) for VWDRY, click here.
ROK shares were trading at $203.75 per share on Monday afternoon, down $10.76 (-5.02%). Year-to-date, ROK has declined -41.36%, versus a -15.84% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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