Emerson Electric (EMR) had a bad second quarter. Earnings per share came in at $0.74 per share, which fell below consensus expectations of $0.80 per share. Emerson noted that its expectations for expansion in Europe and China are now lower than those of just 90 days ago when it issued original guidance for fiscal 2012. This is not the first quarter, but the second time in a row this has happened to the company and it is not a place analysts are flocking to wanting investors to buy.
The majority of the analysts are hiding in neutral or the hold position. The company is presently trading at 48.46 and Credit Suisse lowered its price target from $55 to $53 on an Outperform rating as expectations are revised down to the bottom of the guidance range post Q2 earnings. When the company itself is adjusting its expectations downward, what are others suppose to do? Tyco (TYC) and Ingersoll-Rand (IR) are two companies it competes with but these two are on their way up while Emerson regresses. So Emerson has discouraged Credit Suisse from even considering upgrading it through the rest of 2012.
It is very interesting that Emerson stated that some of its challenges this year come from a deteriorating demand in HVAC. Yet Stephen Simpson of Seeking Alpha wrote an article about the company and the challenges it faces. This is what he had to say about HVAC:
"On the climate side, commercial HVAC trends have been improving, and United Technologies (UTX), Ingersoll-Rand (IR) and Johnson Controls (JCI) all had relatively positive things to say about how the market was developing."
So is this a challenge for Emerson, or is it just behind its competition?
Emerson has pushed against the "53" resistance all year has not been able to get through before it regresses. If we look at the MACD, we can see a steady weakening on each attempted push through. The indicator is exposing the worn out momentum of the stock and I am not certain it will attempt another push through anytime soon this year. So how does an investor make money on the stock without looking for a long term investment at this point?
One way would be timing the movement of the stock if it identifies a trading zone which it look like it just might. If it is trading between (48-53), like it appears to be, here is a strategy using covered call selling.
- Buy the stock on the rebound now trading at 48.50
- Sell a June 2012 call with a strike of "49" (priced at $1.15)
- As the stock moves up, two scenarios play out
- First, if the stock moves past the "50" marker the trade nets the investor ($1.50 + $1.15) = $2.65 or 5.4% profit on the exercised option plus the initial premium
If the stock does not move to the "50" mark year, the premium along nets the investor 2.4% for the month. Then there are a couple options the investor can do with the stock.
But this is one example of a short term strategy for Emerson Electric. Opportunity exists with this stock even if a long term investment will not move up this year.