US Electrical Equipment & Multi-Industry "EE/MI Morning Note - VRT/ROK/C..."

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US Electrical Equipment & Multi-Industry "EE/MI Morning Note - VRT/ROK/C..."

ic sales growth and high

incremental margins year over year. ROK benefits from the emerging short cycle

recovery, and is also able to drive a high level of earnings conversion as it realizes the

benefits of cost actions. We have a Neutral rating however, as at 33x NTM P/E shares

already appear to be pricing in a re-acceleration in demand. We also think that ROK's

growth trends are fairly muted when looked at beyond a 1-year horizon. For example,

our F3Q forecast implies revenues 1-2% below FY23 levels on an organic basis. This

could be a positive data point, indicating that ROK sales have more runway to grow. But

it also aligns with the view that ROK's organic growth potential is relatively modest over

time: more in line with general industrial output, rather than a secular winner of

increasing automation.

On upcoming F3Q results, we forecast 7% organic sales growth year over year,

above consensus at 6%. We think this is an achievable growth rate as it would put

ROK closer to (but still 1-2pts below, in line with last quarter) general industrial

activity, as measured by industrial production + PPI. See Figure 2.

On F3Q margins, we assume segment margin is flat sequentially at 23.7%. We

model a sequential increase in revenues, but expect margins to be unchanged due

to cost inflation and timing of price-cost. Our margin forecast for the quarter still

embeds a very healthy year over year incremental of 74%, up from 50% in 1H.

Our assumptions result in F3Q EPS of $3.43, ahead of consensus of $3.37.

CR Preview- Heading into 2Q, we are modelling $1.70 of EPS, about $0.04 ahead of

current consensus. Demand trends for the business overall continue to be tracking well