Emerson Electric Company (NYSE:EMR) is a global technology and manufacturing company that is known for its engineering capabilities and management excellence. The company has recently taken certain initiatives to better position itself against its peers. Let's see how the performance of the company has improved and how the company's stock price behaves in relation to the recent changes.
A major chunk of the revenues of the company are generated from the US and Canadian region; however, high growth is expected to come from the emerging markets. According to the 2013 annual report, the company experienced a growth in sales of 2% in Asia, 9% in Latin America, 12% in the Middle East/Africa region, negative 2% in Europe, and 0% in the US and Canada when compared to the sales figures in 2012. The geographical distribution of the company's revenues is shown in the pie chart below.
Source: Annual Report, 2013
With regards to the distribution of the revenues based on various functions of the company, the different segments of the company have exhibited varying behaviors. High growth was experienced by some segments and negative growth shown by others. Sales revenue from the process management segment has shown a rising trend over the past two years. However, the increase in revenue from this segment was offset by decelerating trends in the sales revenue of other segments. Thus, the total earnings of the company increased by only 1% in 2013 compared to the 2012 earnings level. The distribution of revenues, as per functions of the company, is shown in the pie chart below.
Source: Annual Report, 2013
To distribute profits among the shareholders of the company, Emerson has maintained a history of continuous and consistent increases in dividends. Moreover, the company has been in the process of reducing the number of shares outstanding (share buyback) for further distribution of surplus cash.
Dividends paid by the company increased by 3% in 2012 compared to the previous year. For the first quarter of 2014 the company has announced a dividend per share of $0.43 translating into a 5% increase in quarterly dividends in 2013.
Through the share buyback program the company has retired more than 17 million shares over the past five quarters. A reduction in the number of shares has given an upward boost to Emerson's EPS, the chronological trend of which is indicated in the graph below.
The plunge in EPS in the third quarter of 2013 was a non-recurring event. It was explained by the reduced net profit margin of the company during the third quarter due to a special charge incurred because of the divestiture of its computing and power business.
The company has outperformed its peers in recent history and this was underscored by improved sales growth, a lower debt to equity ratio, and better asset management indicated by a higher asset turnover ratio than the industry average. These ratios combined led to the generation of a higher return on equity than its peers.
Approximately 55% of the total revenue of the company is attributed to the process management and industrial automation segments of the company. Emerson plans to further expand the operations for these two segments and plans to invest $1.5 billion in this regard in the present year.
Recently, the company has completed the acquisition of a 44.5% ownership stake in SPX Corporation (SPX) of the EGS Electrical Group. Previously the company was jointly controlled by SPX and Emerson. The acquisition of EGS, renamed to Appleton, gives Emerson a hundred percent ownership control of the business that is expected to bolster the future profit margins and geographical presence of the company. This acquisition is also expected to strengthen its competitive position in the oil, gas, and chemical industry.
The revenues of the company are expected to be boosted in 2014 since the global economy is expected to improve with higher growth expected in Asia and Europe. The high growth regions contribute about 44% to the total revenues of the company as per the recent annual report. The progress of the economy will directly impact the demand of the energy resources and further benefit the Appleton Group. The company reportedly generates more than half of its revenues from the energy and chemical sectors.
Moreover, Shell has recently contracted Emerson to ensure an Uninterrupted Power Supply (UPS) required for the production of Shell's Floating Liquefied Natural Gas (FLNG). Shell is the first company in the world to introduce the concept of liquefied natural gas and is working towards its successful production in Korea. The contract will boost Emerson's top line; specifically the network power segment of the company. It is important to point out that it is the second contract between Shell and Emerson within the three years and highlights the service reliability of Emerson's businesses. It is reasonable to assume that Shell will continue to utilize the various products and services of Emerson in the future as well.
Emerson's profit margins are expected to jump in the present year due to favorable changes expected in the economy and the company's strategic acquisitions. The company's contract with Shell indicates its reliable service, the likelihood of such ties to be maintained in the future, and assurance of more contracts in the future.
These events will lead to price appreciation of the company's stock. Moreover, the company has maintained a record of consistent and continuous distribution of profits to its shareholders. Higher profit margins will entail a higher cash distribution among investors as well. Based on these facts and figures, I would recommend buying the stock.