In my recent article published on 6/11/2012, which was the Miscellaneous Industrials installment of my "Yield, Value, Safety" series, I had identified Emerson Electric (EMR) as a desirable holding, based upon the first-pass review presented in the article. I also noted that it was a stock I had just started a position with, buying in at $45.85 a share on 6/6/2012. The stock subsequently gained ground, and I was berating myself for being so timid, as I had started out with a very small position. The stock then dropped below $45 again on 6/25/2012, stayed there a day or two, and then popped up again. I must have been asleep at the switch, since I missed it. Finally, with the sell off last Friday, 7/6/2012, the stock dipped below $45 a third time, providing me with yet another opportunity to atone for my lack of faith in my earlier analysis, as the stock was again available at an attractive price. In this article I will present an update on what I learned about the firm from additional study, undertaken as I was mulling over what to do. I will include links to several recent Seeking Alpha articles on Emerson that were informative, and helped with my decision. Finally, I will share with the reader what action I took, and why, per my thinking at the time. As a post-script, I will provide a link and a quote from a new article that I just read, which was not available last Friday, as I was deliberating what to do. The new article told me why I took the action that I did, much better than I could have explained it myself.
Highlights from Recent Annual and Quarterly Earnings Reports
On 11/1/2011, Emerson reported outstanding annual results for fiscal year 2011, which for Emerson ended on 9/30/2011; Revenues were $24,222 million, Net Income was $2,480 million, and EPS was $3.27, all representing significant gains from fiscal year 2010. The firm provided optimistic guidance for fiscal year 2012, with EPS growth expected to range from 8% to 12%. On 2/7/2011, Emerson reported disappointing quarterly results for the first quarter of fiscal year 2012, ending on 12/31/2011. Sales were down 4% from the comparable period, and EPS was down 21%. The flooding in Thailand was partially responsible, along with investment deferrals by U.S. telecommunications carriers, European uncertainty, and residential construction weakness in the U.S. and China. The guidance for 2012 was revised down a bit, but was still strong, with management indicating that they expected these problems to be temporary. EPS for 2012 was expected to be in the range $3.45 - $3.60. The stock was hardly affected, as a significant rally was under way, and the market apparently could not be bothered by a poor quarterly report at that point. From the first of the year to 5/1/2012, the stock fluctuated in the range $47.50 - $52.50, with the report on 2/7/2011 having very little impact on the stock price. On 5/1/2012, the company reported results for the second quarter of fiscal year 2012, which ended on 3/31/2012. Even though the numbers indicated that things had improved from the prior quarter, it was clear that Emerson's sales recovery was not as robust as investors desired. Fiscal 2012 guidance was revised again, with EPS now expected to be in the range $3.35 - $3.50. The market's mood and / or attention span had changed by this time, and the stock dropped from $52.50 to below $49.00 immediately, and has declined further since, touching below $45 on a couple of occasions, as described in the opening paragraph. The summaries of earnings releases are available for each financial release from Emerson's website in the subsection Financial Releases, under the Investor Relations section. SEC filings are also available from the Investor Relations section.
So, the recent slowdown since the end of fiscal year 2011, combined with renewed worries of a possible recession looming, along with a number of other macro-level concerns, has resulted in a drop in the price of Emerson such that shares can now be purchased at levels not seen since the Summer-Fall swoon of 2011, and before that period, since the similar swoon of 2010.
Emerson Electric Company was originally incorporated in 1890. The company has a market capitalization of $33.1 billion, and is thus a large cap stock. There are 733.6 million total shares outstanding, and there are no preferreds, which is a positive for an investor contemplating purchase of common shares. The firm is headquartered in St. Louis, Missouri, and has 133,000 employees, with 235 manufacturing locations worldwide. The GICS classification is Industrials, Electrical Components and Equipment. The firm is organized into five business segments, as follows: Process Management (28%), Industrial Automation (21%), Network Power (27%), Climate Technologies (16%), and Commercial and Residential Solutions (8%). The company does business all over the world, with volume by region as follows: U.S and Canada (45%), Europe (22%), Asia (23%), Latin America (5%), and Middle East / Africa (5%). The stock is a component of the S&P 500 index (SPX), the New York Composite index (NYA), and many other indices. It is a component of the SPDR Industrial Select ETF (XLI), and numerous other ETF's as well. It is a top ten holding of over 70 mutual funds, per Yahoo Finance.
In short, this is a major industrial stock. It is a cyclical stock, tied to the general health of the worldwide economy, as much as a company can be.
Revenue and Profitability
Note that all fundamental values and ratios are as available from the MSN Money website.
The most recent annual and quarterly results were highlighted earlier, and as noted, have resulted in a more than 10% decline in the stock price since 4/30/2012. To get a clearer picture of the recent results by quarter, consider the results for the last five quarters: (Note that Revenues and Net Income figures are in millions.)
Quarter Ending / Revenues / Net Income / EPS
03/31/2012 / $5,919 / $545 / $.74
12/31/2011 / $5,309 / $371 / $.50
09/30/2011 / $6,545 / $761 / $1.02
06/30/2011 / $6,288 / $683 / $.90
03/31/2011 / $5,854 / $556 / $.73
As can be seen, the most recent quarter bested the comparable year-ago period, even if only slightly, but was below the results of the two quarters immediately following the year-ago period.
Recent margins / five-year averages are: Gross Margin, 39.4% / 38.2%; PreTax Margin, 14.35% / 14.1%; and Net Margin, 9.9% / 9.8%. Recent returns / five-year averages are: Return on Equity, 22.06% / 23.6%; Return on Assets, 10.0% / 10.5%; and Return on Invested Capital, 13.8% / 14.6 %. Nothing seems amiss in any of these figures.
Taking a longer range view, the ten year history of annual results, considering Revenues, Net Income, and EPS shows steady increases year by year for all three, except for the expected dip in 2009, coincident with the financial crisis, with progress resuming in 2010. By 2011, Emerson posted new highs in Revenue ($24.22 billion) and EPS ($3.26), and tied with 2008 for a new Net Income high ($2.45 billion).
These figures basically confirm that Emerson is a cyclical stock that posts positive results in good times and bad, with new records being limited to the better times.
Dividend Information and History
The current quarterly dividend is $.40 per share, which generates a yield of 3.54% at a share price of $45. The company proudly notes on the annual report that it has increased the dividend for 55 years in a row. The most recent increase was on 11/8/2011. Just looking at the most recent five years, the dividend has increased by 52% over this period. The Payout Ratio is only 47%. Emerson is an S&P Dividend Aristocrat, is one of David Fish's Dividend Champions, and is on Mergent's Dividend Achievers list. This is a dividend record that will not be broken, except under the direst circumstances imaginable, or maybe even beyond imaginable.
Financial Position and Debt
The MSN Money website data for EMR shows Leverage Ratio as 2.3, Debt to Equity Ratio as .56, and Interest Coverage as 16.6, all very satisfactory numbers. Looking at the balance sheet from the most recent quarterly filing, I calculate the ratio of Long-Term Debt to Total Capitalization as 16%, the ratio of Stockholder's Equity to Total Capitalization as 43%, and the ratio of Total Liabilities to Total Capitalization as 56%. While I would prefer that the equity ratio exceeded 50%, and that the corresponding total liabilities ratio was less than 50%, neither of these numbers is far enough from those desired values to really be of concern. The corporate debt ratings of A from S&P and A2 from Moody's, both roughly in the middle of the investment grade ranges, provide further comfort regarding EMR's debt position.
Valuation and Technicals
EMR is at or approaching price ratios typical of a value stock in most cases. The opening paragraph noted the recent price decline to $45. At this price level, the present valuation metrics, and for reference, the levels for a value stock, are:
EMR: P/E = 14.4, Price/Book = 3.15, Price/Sales = 1.38, and Price/Cash Flow = 10.3.
Value Stock: P/E < 15, Price/Book < 1.5, or at least not > 3.0, Price/Sales < 1.50, and Price/Cash Flow < 10.00
The stock has a beta of 1.2, implying it is a little more volatile than the general market. The charts basically tell the story already observed, that the stock has been in decline since April 2012, and is sitting near an interim low.
Ratings and Sentiment
As is typical for a well known large cap stock, analyst coverage is extensive. S&P rates the firm as only a Three-Star, i.e. a Hold, with Medium risk, and with an Earnings and Dividend Quality rating of A+, the highest available for that category. Morningstar rates it a Four-Star stock. Thomson-Reuters indicates that there are nineteen analysts following the firm, with five rating EMR a Strong Buy, six a Buy, and eight a Hold. Various other ratings of interest are: Schwab - D, Under Perform, Credit Suisse - Out Perform, Argus - Hold, The Street - Buy, Ford Equity - Hold, Columbine Capital - Hold, and EVA Dimensions - Over Weight. The ratings seem to be weighted slightly towards the positive, with the exception of Schwab.
I always do a search on Seeking Alpha as part of my stock research on a firm, to see if any articles are available which might offer further insights. As I anticipated, there are several recent articles available on EMR. Five focused on the stock are:
- Emerson Electric: Profitability Analysis, by contributor Jeff Williams, published 6/28/2012.
- Emerson Electric: Inside The Numbers, also by Jeff Williams, published 6/26/2012.
- Dividend Growth Gem Emerson Electric Cuts Revenue Outlook, by contributor Valuentum, published 6/28/2012.
- Emerson Electric: Dividend Stock Analysis, by contributor Dividend Growth Investor, published 5/25/2012.
- Emerson Electric's Dividend Still Strong Despite Hiccup In 2Q, also by Valuentum, published 5/2/2012.
I would recommend all of these articles to an investor contemplating an investment in EMR. All are informative, presenting relevant facts and figures from various perspectives. All are positive on the firm as a long-term, dividend growth stock investment.
Before I conclude, in the interest of full disclosure, I want to note that I am not a financial professional, nor am I certified in any way as a financial advisor. I am an independent, individual investor, focusing on dividend-paying stocks exclusively.
As anyone reading this far has probably guessed, I believe the present weakness in EMR shares presents an opportunity to acquire shares at a better price than is usually available for this solid industrial. When one considers the alternatives, with fixed income at all-time lows, and most quality stocks, such as Coca Cola (KO) and Colgate Palmolive (CG), to name two examples, priced into the stratosphere, buying EMR here would seem to be a no-brainer. But what if a really nasty recession hits, as some pundits have suggested? A cyclical stock like EMR could decline much further under that scenario. Plus, what about Europe, what about a slow-down in China, what about the U.S, "fiscal cliff", what about Iran, what about the Economic Cycle Research Institute's (ECRI) call for a global recession, and who knows what else that could befall the world economy? That is the crux of the issue - buy now at a "good" price, or wait for a better price, which very well may come along if any one of a half-dozen or so possible known problems should erupt. After some soul-searching, I decided I could not waste the opportunity to add to my EMR position at $45, give or take a few cents. On 7/6/2012, I bought more shares of EMR, doubling my position. I have still not gone "all in", in that my position is even now only up to half of the maximum size allowed, under my position sizing rules. But at least I have a respectable holding, such that I won't be kicking myself if none of the dire possibilities occurs, the stock recovers, and the present situation turns out to be a rare buy opportunity caused by short-term events.
To close, I want to present a direct quote from a new article from contributor Jeff Miller, entitled Weighing The Week Ahead: Will Earnings Season Disappoint? The following snippet seemed to have been written for just this situation:
"It is especially important to establish good, long-term positions when prices are favorable. Most individual investors seriously underperform long-term results by selling low and buying high. Most successful professionals, of course, do the opposite."
I heartily recommend the entire article, especially the sections headed Investor Time Frame and There is no magic moment. Resolving market worries is a process, not an event.
No matter what happens near-term with EMR and the market's gyrations, I am confident that I made a good decision to add to my position at the $45 price while it was available.
Disclosure: I am long EMR.