Bond Analysis
Bonds of a company is equal to the sum of its short-term and long-term debts. Rockwell Company’s short-term liabilities, as indicated in the 2017 annual report, is $600.4 million. The company’s long-term deficits, on the other hand, is $1.243 billion. Therefore, Rockwell Company total bond is $1.8434. Note that the total net worth or the sum of Rockwell Company’s fixed and current assets, as per the 2017 annual report, is $7.162. That means the creditors own about 25.7 percent of Rockwell Company, which puts Rockwell Company to an elevated risk of being taken over by the creditors (placed under receivership) because the debt is quite high. Also, the fact that the debtors occupy more than a quarter of Rockwell Company gives them the power to influence the decisions made by the company. For example, the debtors can prevent Rockwell Company from taking additional huge loans, especially when they believe it will prevent the company from paying them.
The other adverse effect surrounding Rockwell Company due to its huge bonds concerns the interest expense. According to the 2017 financial report, the company paid $76.2 million as interest expense. The interest expenses are charged at two different rates. (In 2015, Rockwell Company obtained debt worth $600 million from different banks at 2.165% interest rate for 2025 Notes and 1.755% interest rate for 2020 Notes). So, based on this deal alone, Rockwell Company incurs a total of 3.92% as the annual interest rate on debts, which is about $23.52 a year (3.92 percent of $600). Note that interest expense is subtracted from the company’s revenues in the income statement; as a result, the higher the interest expense, the lower the profitability. In the 2017 financial year, for instance, Rockwell Company’s interest expenses were 9.2 percent of its net income respectively (Annualreports.com, 2018).
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As stated earlier, high-interest expense reduces the profitability; consequently, the company usually remain with limited profit share to reinvest in the business which reduces its sustainability. In simple terms, the fact that Rockwell Company spends much of its profits on interest expenses, it usually remains with little profit shares to reinvest in sustainable programs such as research and innovation. As a result, its sales are more likely to decrease in the future, especially when its competitors (that invest heavily in innovation) come up with more efficient products.
Stock Analysis
Current stock price: The current price of Rockwell Company is $132.92. However, this price is more than that of its major competitors. The current stock price of Siemens AG is $59.18; ABB Ltd, $20.63; Schneider Electric SA, $74.45; Emerson Electric Co., $69.87; and Mitsubishi Electric Corp., $25.875. That is the case despite the fact that most of these competitors are more profitable than Rockwell Company. For example, Schneider Electric SA’s current stock price is $74.45, yet it made $2.24 billion net profit in the 2017 fiscal year, which is about thirty times $76.2 million that Rockwell Company garnered. According to Brooks and Mukherjee (2013), the price of a company’s common stock has a strong correlation with its profitability, which means Rockwell Company’s stock is overvalued.
Book price of the stock: According to Rockwell Company’s financial report, its book price of the stock is 164.84. However, the actual book value is extremely higher than that. The actual book value of the stock is estimated by dividing shareholders equity by the outstanding number of shares (Aharoni et al., 2013). In Rockwell Company’s case, the shareholders' equity, as per the 2017 financial report, was $1.9901 billion. The number of outstanding shares is 3,690,880. Therefore, the actual book value of Rockwell Company is $1.9901 billion ÷ 3,690,880 = $539.193. So, based on book value analysis, Rockwell Company’s current price is undervalued.
Forecasted price: Based on the information in the 2017 annual report, the forecasted stock price of Rockwell Company can be estimated using the following formula. The forecasted price= current price × (1+ [last dividend/current price] + expected growth in dividend) time (t). The last dividend for Rockwell Company was $3.04. The current price is $132.92. However, the expected growth is unknown, but it can be estimated using the average of the last growths, i.e., the mean of growth in the dividend over 2015-2016 and 2016-2017. (Dividends in 2015 and 2016 were $2.6 and $2.9 respectively). Therefore growth in 2015-2016 and 2016-2017 periods were 0.12 and 0.05, respectively, and their mean is 0.085. If you substitute in the original formula, the forecasted price of Rockwell Company in FY2018 = $132.92 × (1+[3.04/132.92] + 0.085)2= $248.94. However, using the P/E ratio (price per share/dividend per share), the projected value of Rockwell Company is $43.72 or 132.92/3.04.
Fair value. The fair value of the stock is estimated using the P/E ratio (price per share/dividend per share) and then comparing with other companies in the industry (Aharoni et al., 2013). Therefore, the fair value of Rockwell Company is $43.72 or 132.92/3.04. It is fair since it close to current stock prices of most of its competitors including Siemens AG whose price is $59.18.
Conclusion
To conclude, Rockwell Company’s bond is quite high; as a result, the company is incurring huge interest expenses which reduce its profitability. Also, the huge bond has reduced the company’s capacity to reinvest in research and innovation; hence, minimizing its ability to compete favorably in the future. Finally, due to the high bond, the creditors have the power to influence the decision of Rockwell Company, which may restrict it from making profitable moves. Regarding stock analysis, the current price of Rockwell’s stock is overvalued compared to its competitors. Therefore, potential investors should sell the stock as it will soon drop to hit the fair level.
References
Aharoni, G., Grundy, B., & Zeng, Q. (2013). Stock returns and the Miller Modigliani valuation formula: Revisiting the Fama French analysis. Journal of Financial Economics , 110 (2), 347-357.
Annualreports.com. (2018). Rockwell Automation, Inc. Retrieved from http://www.annualreports.com/HostedData/AnnualReports/PDF/NYSE_ROK_2017.PDF
Brooks, R., & Mukherjee, A. K. (2013). Financial management: core concepts . Pearson.
