This is an excerpt from a blog originally published on 11/5/14:
In addition to the AMOT disposition, I also discuss in that post my positions in the Vanguard Health Care Fund Investor Shares, ARCC, BHLB, and HCP.
Assuming no material adverse developments, I will consider buying another 50 shares at below $60.
Snapshot of Trade:
2014 Bought 50 EMR at $64.37
Company Description: Emerson Electric Co. (NYSE:EMR) is a large industrial company that operates in five business segments: Process Management; Network Power; Climate Technologies; Industrial Automation and Commercial and Residential Solutions.
The Company provides a detailed summary of its products within each business segment starting at page 3 of its last SEC filed Annual Report: EMR 9/30/2013 10-K
Breakdown of Revenues/Profits By Business Segment:
The revenue numbers for the 2014 F/Y were negatively impacted by divestitures and currency conversions.
Emerson Electric Profile Page at Reuters
Emerson Electric Key Developments Page at Reuters
Company Website: Emerson
Morningstar has gives EMR a three star rating and estimates fair value at $69. The consider to buy price is $48.3 which I would view as unlikely barring a recession. The consider to sell price is at $93.15, which is too high in my opinion.
I would view EMR as outside a fair value range at 18 times (or higher) the consensus F/Y 2015 E.P.S. estimate of $4.05. EMR Analyst Estimates That would put the upper end of my fair value range at $72.9.
EMR's fiscal year ends in September so that would be through September 2015. The F/Y 2016 estimate is currently $4.45. If that F/Y 2016 holds by this time next year, then the top end of my fair value range would then be $80.1.
S & P has a 3 star rating with a $71 twelve month price target which I view as more realistic.
Credit Suisse has a buy rating with a $72 price target.
Argus has a buy rating and a $75 target price.
CS and Argus reports are available to Charles Schwab customers
EMR Key Statistics (based on $64.45 Price):
TTM=Trailing 12 Months
Forward P/E (F/Y 2015): 14.48
Estimated Five Year P.E.G.: 1.7
ROA TTM: 10.32%
ROE TTM: 24.38%
Profit Margin TTM: 10.32%
Operating Profit Margin TTM: 16.44%
Revenue Per Share TTM: 34.86
EMR's senior debt is currently rated A2 by Moody's and A by S & P according to FINRA.
An EMR bond with a 5.375% coupon and maturing in 2017 has a YTM of just 1.32% based on the closing price today. Bonds Detail I pick up more than twice that yield with the common stock.
I would not view the stock as either cheap or expensive at the current price, but more within a broad fair value range based on estimated 2015 fiscal year earnings.
Prior Trades: I took my profit and liquidated my EMR position back in April 2007.
I bought back two small 25 share lots in 2008 using cash flow from dividends and interest payments. I reinvested the dividends and liquidated the position on 11/1/2010:
; 52+ Shares +$600.68)
Item # 6 Sold EMR at $55.42 (11/2/2010 Post) Almost all of the profit originated from just a 25 share lot purchased on 11/10/2008. I briefly mentioned buying that lot in a November 2008 post: EMERSON 11/10/2008 Post (bought at $33.33).
EMR has substantially underperformed an industrial sector ETF since I sold this lot. I calculated the annualized total returns for two industrial ETFs and EMR between 11/1/2010 through 11/4/2014:
Annualized Total Returns:
XLI: 16.73% XLI Industrial Select Sector SPDR ETF
VIS: 16.98% VIS Vanguard Industrials ETF
I did not miss much by selling out in November 2010. Hopefully, EMR will play catch up going forward.
Chart: At the time of my purchase, the stock had broken its 50 day SMA line to the upside and was sitting about $1 per share below its 200 day SMA line. EMR Interactive Stock Chart
The YF maximum chart for EMR goes back to 1972. EMR Interactive Stock Chart Starting with the onset of the last long term secular bull market (August 1982), EMR has moved up from a split adjusted price of approximately $4.85 to its current range, though there has been some drama along the way.
Dividends: Emerson just raised its quarterly dividend to $.47 from $.43 per share or 9%. Emerson Increases Quarterly Cash Dividend That was one reason for buying the stock back.
This was the 59the straight year of dividend increases. EMR is a member of the Dividend Aristocrats.
The dividend growth rate is generally good at close to 7.75% over the past 10 and 25 years. Dividend
Emerson increased its dividend during the Near Depression period. Emerson Electric Dividend Date & History That needs to be contrasted with GE who slashed its dividend. The dividend data is not adjusted for stock splits. There was a 2 for 1 split in 2006.
Last Earnings Report: Emerson reported that underlying sales increased by 4% in its 4th fiscal quarter ending on 9/30/14. Revenues were relatively flat after divestitures and currency conversions. Revenues in North America rose "8 percent, reflecting improved economic conditions, while sales in Europe were flat due to weaker market conditions."
Underlying orders increased by 9% during the quarter and the company exited the quarter with a record backlog of $6.7B. The company expects underlying sales growth between 4%-5% during the current fiscal year, excluding the impact of divestitures and currency conversions.
The potential divestiture of the power transmission business would reduce the number by about 2%. (June 2014 News Release: Emerson Evaluating Strategic Alternatives for the Power Transmission Solutions Business)
Rationale: With a quality company like EMR, my objective is a total annualized return in the 8% to 12% range. Part of that total return will originate from the dividend.
At the current quarterly rate of $.47 per share, the dividend yield is about 2.92% at a total cost of $64.37 per share. I would like to bring the starting yield over 3% with an average down which would then bring this purchase within the parameters of my dividend growth strategy. Item # 6 Common Stock Dividend Growth vs. Long Term Investment Grade Bonds (3/22/2010 Post)
Growth in several major markets looks okay for the next twelve months. The CEO noted in the recent conference call that the U.S., Canada and Mexico "looks very solid right now". Revenues in the just completed fiscal year grew 7% in China and will probably grow "closer to 5%" in the current fiscal year.
Risks: Industrial stocks tend to be cyclical. The earnings growth of large industrial companies like Emerson are tied to worldwide GDP growth particularly in emerging markets. In short, EMR is not going to buck a recession in developed markets and/or a slowdown in emerging markets. The share price did crater during the recent Near Depression, falling to a closing low of $24.87 on 3/9/09: EMR Historical Prices
Europe is an important market for EMR. The CEO noted on the last conference call that Europe was "weakening" and "clearly heading down, potentially for its third recession since" 2008.
EMR's products are used in the energy sector and the recent decline in oil prices could have a negative and material impact on EMR's profits, a point highlighted by management on the recent earnings call. Conference Call Transcript - Pg.5 - TheStreet
The company discusses risks incident to its businesses starting at page 11 of its last SEC Annual Report. EMR 9/30/2013 10-K
Future Buys: I will consider averaging down but not up.
Disclosure: The author is long EMR.
Additional disclosure: Disclaimer: I am not a financial advisor but simply an individual investor who has been managing my own money since I was a teenager. In this post, I am acting solely as a financial journalist focusing on my own investments. The information contained in this post is not intended to be a complete description or summary of all available data relevant to making an investment decision. Instead, I am merely expressing some of the reasons underlying the purchase or sell of securities. Nothing in this post is intended to constitute investment or legal advice or a recommendation to buy or to sell. All investors need to perform their own due diligence before making any financial decision which requires at a minimum reading original source material available at the SEC and elsewhere. Each investor needs to assess a potential investment taking into account their personal risk tolerances, goals and situational risks. I can only make that kind of assessment for myself and family members.