Automation: Demand Healthy but Softening on Tougher Comps, Optimistic on 2H1

Mark Douglass, Sr. Equity Analyst of Longbow Research, follows a number of companies who are in the industrial automation space. Here is his latest report. Overall an optimistic report.

Demand remains healthy though growth is slowing on tougher comps, and sequential demand has moderated with typical summer sluggishness. Most contacts remain optimistic for 2H11, expecting roughly double-digit growth, with Process contacts relatively more bullish vs. Discrete. No change to our estimates as we think companies will be at least in line with expectations for the June quarter though, given the strength in Process markets, we see potential upside to guidance and estimates for ROK, EMR and AME.

Contacts are reporting relatively healthy y/y demand though tougher comps are challenging growth rates. Fifty-seven percent of contacts report stronger y/y demand (vs. 80% in Mar), 35% flat (vs. 19%), and 7% down (vs. 2%).

There is notable strength in food and packaging equipment OEMs, water & wastewater, semiconductor, oil & gas, chemicals, and automotive. End market softness was attributed to general industrial activity rather than specific end markets. Contacts in Canada and Germany echo similar sentiments.

Prices Going Up: As announced on its last earnings call ROK is instituting its second price increase in the past 12 months, up 5-7% and slated for the end of July. Schneider Electric is also implementing a price increase in the 5-7% range.

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Inventories/Lead Times Stay In Line. Lead times are similar q/q with inventories largely in check. Some contacts noted inventory build anticipating a strong finish to the year and fears of product shortages. The crisis in Japan has not materially affected business, with product shortages only reported on the margin.

Optimistic on 2H11. Even though there has been a small moderation in the outlook, the majority of our contacts are optimistic and looking at anywhere from mid single-digit to low double-digit growth in the back half of 2011 with Process contacts generally more bullish than Discrete. No change to our ratings or estimates for BUY-rated DHR, ROK and ROP and NEUTRAL-rated EMR, NATI, AME and ETN.

Legend:
ROK - Rockwell Automation Inc.
EMR - Emerson Electric Co.
AME - Amtek Inc.
DHR - Danaher Corp.
ROP - Roper Industries
NATI - National Instruments
ETN - Eaton Corp.

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