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Rockwell Builds a Wide Moat With Prudent Investments

Our moat rating upgrade is a direct result of the automation firm's expansion into new markets.

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We have long considered  Rockwell Automation (ROK) to be one of the higher-quality industrial companies we cover because of its consistently high profitability and a management team attuned to creating value for shareholders. After re-evaluating Rockwell's stance with its customers, power against its competitors, and inherent industry structure, we upgraded our economic moat rating for the firm to wide from narrow because of a high degree of customer switching costs. This is a direct result of the company's successful Logix platform and expansion into new markets.

Rockwell's Moat More Durable Than We Previously Thought
We have admired Rockwell's underlying business, but we've also expressed concern that the company's success in stretching from traditional discrete automation processes into process automation would attract competition, diluting the company's margins or growth potential over the long term. That threat still exists, but we now believe that we failed to place enough significance on the fact that changing automation vendors is a decision not made lightly by a manufacturer; the organizational disruption caused by the change creates a number of potential costs for the customer, making sticking with the status quo the lower-friction choice. As a result, an automation firm like Rockwell has a heavy incumbency advantage, building meaningful barriers to successful entry.

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Daniel Holland does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.