Earnings Analysis: Emerson Electric

| About: Emerson Electric (EMR)

Emerson Electric Co. (NYSE:EMR) recently reported preliminary financial results for the year ended Sept. 30, 2012, which CapitalCube is using to provide a unique peer-based analysis of the company. Our analysis is based on the company's performance over the last 12 months (unless stated otherwise).

Emerson Electric Co.'s analysis vs. its peers uses the following peer set: General Electric (NYSE:GE), Honeywell International (NYSE:HON), ABB Ltd. (NYSE:ABB), Danaher (NYSE:DHR), Schneider Electric S.A. (NYSE:SU), Roper Industries (NYSE:ROP), Ametek (NYSE:AME), and Regal-Beloit (NYSE:RBC). (For our earnings analysis on Honeywell's recent financial results, click here.) The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Annual (USD million) 2012-09-30 2011-09-30 2010-09-30 2009-09-30 2008-09-30
Revenues 24,412.0 24,211.0 21,044.0 20,939.0 24,807.0
Revenue Growth % 0.8 15.0 0.5 (15.6) 9.9
Net Income 1,968.0 2,454.0 1,978.0 1,724.0 2,454.0
Net Income Growth % (19.8) 24.1 14.7 (29.7) 14.9
Net Margin % 8.1 10.1 9.4 8.2 9.9
ROE % 18.9 24.3 21.6 19.5 27.4
ROA % 8.3 10.5 9.3 8.5 12.1

Valuation Drivers

Emerson Electric Co. currently trades at a higher price/book ratio (3.5) than its peer median (1.8). Emerson Electric Co.'s operating performance is higher than the median of its chosen peers (ROE of 18.9% compared to the peer median ROE of 13.9%). The market does not seem to expect higher growth relative to its peers (P/E of 18.9 compared to peer median of 16.8), but simply to maintain its relatively high rates of return.

The company's median net profit margins of 8.1% and relative asset efficiency (asset turns of 1.0 times compared to peer median of 0.7 times) give it some operating leverage. Emerson Electric Co.'s net margin is its lowest relative to the last five years and compares to a high of 10.1% in 2011.

Economic Moat

Changes in the company's annual top line and earnings (0.8% and -19.8%, respectively) generally lag its peers. This implies a lack of strategic focus and/or inability to execute. We view such companies as laggards relative to its peers.

Emerson Electric Co.'s return on assets is above its peer median both in the current period (8.3% vs. the peer median of 6.4%) and also over the past five years (9.7% vs. the peer median of 7.3%). This performance suggests that the company's relatively high operating returns are sustainable.

The company's gross margin of 42.5% is around the peer median, suggesting that Emerson Electric Co.'s operations do not benefit from any differentiating pricing advantage. In addition, Emerson Electric Co.'s pre-tax margin of 12.8% is also around the peer median, suggesting no operating cost advantage relative to peers.

Growth and Investment Strategy

Emerson Electric Co.'s revenues have grown at about the same rate as its peers (5.2% vs. 5.7%, respectively, for the past three years). Similarly, the stock price implies median long-term growth as its P/E ratio is around the peer median of 18.9. The historical performance and long-term growth expectations for the company are largely in sync.

Emerson Electric Co.'s annualized rate of change in capital of 6.2% over the past three years is less than its peer median of 11.4%. This investment has generated a better than the peer median return on capital of 14.3% averaged over the same three years. This combination of a relatively low investment with good returns suggests that the company is likely milking its business.

Earnings Quality

Emerson Electric Co.'s net income margin for the last 12 months is around the peer median (8.1% vs. the peer median of 8.1%). This average margin combined with a level of accruals that is around peer median (4.4% vs. the peer median of 4.4%) suggests there possibly isn't too much accrual movement flowing into the company's reported earnings.

Emerson Electric Co.'s accruals over the last 12 months are positive, suggesting a buildup of reserves. However, this level of accruals is also around the peer median and suggests the company is recording a proper level of reserves compared to its peers.

Trend Charts

Company Profile

Emerson Electric Co. manufactures and develops process controls systems, valves and analytical instruments. It delivers products and services to the industrial, commercial and consumer markets. The company operates through five segments: Process Management, Industrial Automation, Network Power, Climate Technologies, Tools and Storage. Emerson Electric was founded on Sept. 24, 1890, and is headquartered in St. Louis, Mo.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.