Emerson Electric Co. Seeking Industries' Favor For Upcoming Growth

Feb.12.14 | About: Emerson Electric (EMR)

Emerson Electric Co. (NYSE:EMR), a diversified technology company, develops and supplies technology and engineering products, solutions and services to the industrial, commercial, and domestic markets around the world. The company has just reported its fiscal year 2014 Q1 results which are in-line with analysts' estimates stemming from a slight recovery in the industries in which the company operates. However, in order to identify opportunities in the company's stock, a look at the future outlook of those industries will be essential to determine the growth prospects for the company. Therefore my article is aimed at updating you regarding these key areas.

To move systematically, I will begin my article by elaborating the major revenue driving industries for the company.

Major Revenue Driving Industries for Emerson Electric

Source: EMR Credit Suisse Conference Presentation

You can see from the pie chart above that the company generates 48% of its revenue from the oil and gas industry and other industries generate 27% of the company's revenue. Since the company is not related to a specific industry but to a number of industries I will be considering the overall outlook of the industrial materials under the analysis of the industrial automation industry. The commercial and residential solutions industry generates 17% of the company's total revenues. The smallest contribution is made by industrial automation. These percentages are based on the December 2013 data disclosed by the company.

After becoming familiar with major industries that drive the growth for the company it's time to check their outlook. Before doing so, let's have a look at the main revenue generating geographic regions for the company. This has helped me to conduct an industry analysis that concentrates more on the outlook of industries in regions that are the major revenue generators for the company.

Source: EMR Credit Suisse Conference Presentation

From the pie chart above, you can see that the company earned around 78% of its total revenue from the U.S. and Canada, as reported in December 2013. As a result, I will pay more attention to the U.S. and Canadian outlooks for the relevant industries in which the company operates.

Oil and Gas Industry

In the North American region, the oil and gas industry is forecasted to see investments in both upstream and downstream operations in the coming years. Southeast Asia will also record an augmentation in oil and gas investments due to the economic recovery in China. In the United States, the oil and gas industry has been forecasted to grow at a CAGR of more than 8% from 2013-2015. The top 10 oil and gas companies (upstream and midstream) are forecasted to have CAPEX spend worth $266 billion during 2013-2017. The following chart highlights some of the major investments announced in the U.S for the oil and gas market and indicates the potential for Emerson Electric's growth, as it will supply its products and services to these projects.

Source: EMR 2013 Investor Conference

Commercial and Residential Solutions Industry

The company's commercial and residential solutions' sales are correlated with the U.S. housing and repair and remodeling market. The U.S residential investment recovery will continue to support stable growth for the company as forecasted through the industry outlook graphs below.

Source: EMR EPG Conference Presentation

You can see from the graphs above that the U.S. residential market is expected to recover in the coming years. Sales of new homes and remodeled homes in U.S. are expected to rise in 2014 and achieve a 3-year CAGR of more than 15% by 2015. China will lead the growth of this industry among the emerging markets of the company.

Industrial Automation Industry

This industry captures growth from overall capital spending by industries in the region. The U.S. has been forecasted to have reasonable levels of capital spending on automation in the coming years. An indicator that could be used to depict the level of investment in a region is the Gross Fixed Investment (GFI). From the following chart you can see the rise in GFI in U.S.

Source: EMR 2013 Investor Conference

From the chart above, you can observe that the U.S. is likely to record a 2% improvement in its GFI by 2015. Overall, mature markets are forecasted to record an increase of around 7% in their GFI spending, rising from $7.6 trillion in 2012 to $8.1 trillion in 2015. As far as the U.S. is concerned you can see a 4.4% growth forecast for spending on industrial machinery from 2010 to 2020 in the chart below.

Source: EMR 2013 Investor Conference

So, overall there seems to be a very bright future for the company in the terms of growth prospects from the industries in which the company serves.

Analyst Ratings in Line with my View

Analysts at Zacks restated a "neutral" rating on shares of Emerson Electric in a research note to investors issued on Friday, January 3rd 2014. They currently have a $73.00 price target for Emerson Electric's stock. Analysts at Credit Suisse reiterated a "buy" rating for Emerson Electric's shares also indicating a $73.00 price target on the stock. Additionally, analysts at Sanford C. Bernstein also appraised their price target on Emerson Electric's stock from $68.00 to $71.00. They currently have a "market perform" rating on the stock. Out of 18 analysts, 12 have rated the stock as hold and 6 have allocated the company a buy rating. I can also see bright growth prospects for the company in the coming years based on the positive outlook of the industries that the company serves. The U.S. is currently the major top-line driver for the company and recovery there, with respect to all industries related to the company, has convinced me to regard the stock as a good buying opportunity.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by a Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article