Emerson Electric - Returns For Investors Still Tied To Economic Tide

| About: Emerson Electric (EMR)

Shares of Emerson Electric (EMR) the supplier of industrial automation equipment, ended Tuesday 2% higher. The company reported its third quarter earnings report before the market open.

Third Quarter Results

Emerson reported third quarter revenues of $6.48 billion, up 3% compared to last year. Underlying sales rose 6% as net growth was negatively impacted by a strong US dollar. On average, analysts expected Emerson to report revenues of $6.61 billion.

Operating margins rose 180 basis points to 19.9% driven by operating leverage and cost reductions. Build up backlog, related to the Thailand flooding, converted in superior margins at the Process Management division. Net earnings rose to $770 million, up 13% compared to last year. Earnings per share came in at $1.04, up 16% compared to last year. Analysts expected Emerson to report earnings of $1.00 per share.

CEO and Chairman David N. Farr commented, "this was a strong quarter in what has become an increasingly uncertain and weakening global economy. We continued to recover from a challenging start to they year despite some obvious signs of slowness around the world."

Segmental Information

Process Management

Sales at the process management division rose 19% to $2.12 billion. The sales increase was driven by global energy investments and backlog conversion related to the Thailand flooding. Margins were up 270 basis points to 23.1% as a result of positive operating leverage and cost benefits. Operating earnings rose to $490 million.

Industrial Automation

Revenues at the industrial automation division fell 1% to $1.38 billion. Underlying sales rose 3% overall, driven by a 12% growth rate in the US. Asian businesses reported flat revenue growth while Europe reported a 4% decline. Strength in power generating equipment was offset by weakness in fluid automation and motors business. Operating profits rose to $259 million. The division generates 40% of its sales in Europe, and the crisis will put pressure on the division's results in the coming quarter.

Network Power

Sales at the network power segment fell 6% to $1.59 billion. Weak telecommunication and information technology markets were to blame. Underlying sales fell 4% while a strong US dollar impacted revenues by another 3%. Operating profits fell to $163 million as a results of volume deleverage, an unfavorable product mix and restructuring charges. Despite ongoing softness, the division anticipates margin expansion in the fourth quarter.

Climate Technologies

Revenues at climate technologies fell 2% to $1.15 billion, but demonstrated signs of improvement. Sales fell 1% and unfavorable currency translation resulted in another 2% decline. Acquisitions boosted revenues by 1%. Operating earnings remained unchanged around $232 million, as margins increased by 60 basis points. The division benefits from cost containment programs.


Emerson Electric sees economies across the world slowing down amidst an increase in uncertainty and lower visibility. Many businesses and consumers are becoming less confident about their prospects. Emerson expects the pace of business investment to remain tepid in the near future.

For the full year of 2012, the company now expects sales growth of 1 to 2%. Underlying sales growth is expected to come in between 3 and 4%. Earnings per share will come in between $3.35-$3.40. The company lowered the earnings forecast by 10 cents, amidst the negative impact of a strong dollar. Operating cash flows are expected at $3.3-$3.4 billion, with annual capital expenditures of around $700 million.


Emerson Electric ended its third quarter with $2.3 billion in cash and equivalents. The company operates with roughly $5.8 billion in short and long term debt, for a net debt position of about $3.5 billion. Net sales for the first nine months of 2012 came in at $17.7 billion. Net profit came in at $1.7 billion, or $2.28 per diluted share. For the full year of 2012, the company is on track to generate annual revenues of $24 billion, on which the company is expected to earn $2.4 billion, or $3.20 per share.

Valued at $36 billion, the market values Emerson at 1.5 times annual revenues and 15 times annual earnings. This valuation compares to a revenue multiple of 2.3 for Danaher Corporation (DHR) and 1.2 times for Honeywell (HON). These competitors trade at 17 and 22 times earnings, respectively.

Currently, Emerson Electric pays a quarterly dividend of $0.40 per share, for an annual dividend yield of 3.2%.

Investment Thesis

Shares of Emerson Electric ended the day almost 2% higher on Tuesday, marking year to date gains of 7%. Shares peaked at $54 during spring, but fell back to the $45 level in June and July. Investors worry about the impact of a global economic slowdown on the industrial supplier. In recent weeks, shares recovered to almost $50 per share.

Over the past five years, shares have moved in a wide trading range of $30-$60 per share. Shares move in line with the cycle of the wider economy and financial markets. The company is reporting the same level of revenues and profits as about five years ago. In the meantime Emerson retired approximately 5% of its shares outstanding. Furthermore, the company boosted its annual dividends to $1.60 per share, for a dividend yield of 3.2%.

While Emerson Electronic has set a very shareholder friendly strategy, the lack of operating improvement makes me hesitant to consider a long term investment in the company. Emerson trades at a fair valuation, but has not reported any growth over the last couple of years. Until Emerson can structurally improve its growth profile, I will not pick up shares anytime soon.

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