Emerson Electric: Perfect for a Market Downturn

I like stocks that are consistent performers, especially in a downturn. That is why I am looking at Emerson Electric (EMR). Emerson is a diversified blue chip with a market cap of $41 billion. It’s the world’s leading maker of power equipment for oil companies, and its businesses include automation systems, climate control, power technology, and electric motors. Recently, EMR posted another stellar quarter: sales were up 12%, and earnings per share 20% over last year (see conference call transcript). So far, so good, but let’s dig deeper.

On Emerson’s balance sheet, long-term debt is only 15% of total assets ($20.8 billion), and is declining. Inventory levels are stable and the quick ratio is a respectable 1.01. Free cash flow (cash from operations less capital expenditures) was $2.3 billion in 2007 and is rising. This “after-all-bills” cash was used to buy back shares and acquire Motorola’s (MOT) communications computing business.

Over the last five years, Emerson’s net income has increased an average of 18% and management has cut operating expenses from 22% to 21% of sales. With $22.6 billion in revenues, that’s a huge savings. Return on equity [ROE], a measure of profitability, was 25% last year; look how this stacks up against the competition (click to enlarge image):

Only ABB (ABB), a Swiss company, had higher ROE. But this comes at a significantly higher price, 22 times earnings, and a lower dividend. Historically, over one-third of investor returns come from dividends; EMR has increased its payout annually for 51 years.

What about international operations?

Emerson has a presence in 150 countries with major operations in Brazil, Russia, India, China, and Dubai. International sales are 54% of revenues, and management expects this will increase.

Emerson’s CEO is David Farr, just named one of the “Best CEOs in America” by Institutional Investor Magazine for “positioning his company to withstand more difficult times ahead.” Top management, top returns. And even though Emerson’s shares have increased 125% over the last five years, insiders think they’re a good buy. A couple weeks ago, director August Busch bought $2.1 million worth at $50.41 a share.

I think EMR is attractively priced at that level. A discounted cash flow, using earnings per share of $3.10, 15% growth the next three years and a 10% discount rate, generated a value of $53. The current price is about $53, so the stock is fairly valued; however, any further market downturns present an opportunity to buy this excellent stock at a sensible price.

Disclosure: The author does not presently own EMR stock.