Don't Underestimate This Industrial Goods Stock!
Ankit is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Emerson Electric (NYSE: EMR) is a $35 billion industrial conglomerate that provides manufacturing equipment and services. With business units in a number of different fields, Emerson has numerous competitors, though most competitors are specialized on a portion of total business field. For example, Emerson competes with General Electric Company (NYSE: GE) in industrial equipment and healthcare supplies, with Caterpillar (NYSE: CAT) in heavy-duty equipment, mining, and farming hardware, and with ABB (NYSE: ABB) in Process Management and Industrial Automation. Before going any deep into the company’s fundamentals, let’s have a look at the features of this company that enticed me to write about it.
- Over the past 3 years, the company’s EPS grew at an average annual rate of 12%. And for next several years, the company’s expected annual growth is ~10%.
- The company has been increasing its dividend since last ~20 years and currently offers impressive dividend yield of 3.21%. The following chart summarizes the dividend and dividend yield of Emerson over the last 20 years:
-
In the last five years the company’s average P/E ratio has been closer to 15 and the stock is currently trading at a forward P/E of 13.35. The following chart shows the historical PE ratio of Emerson:
In my view, the company has built a reputation on a differentiated technology offering and a history of execution which is not fully factored into its valuation. Going forward, I expect the following growth drivers to prompt a re-evaluation of near term discounted valuation.
Growth in Emerging Markets
Management has plans to drive its contribution in emerging market to ~45% of total by 2015 which I believe will prove to be a key driver for growth. In my view, the automation in the factories of these emerging markets largely differs from unique models in North America and Europe which are highly advanced, and thus, I believe the company’s strong footprint in emerging markets will make it a major player in these markets. Therefore, I expect growth in emerging market as a huge positive for the company especially for its automation business.
Internet Retailers to Enhance Operating Margins
Management has plans to sell certain industrial products through internet retailers such as Amazon. Although I expect this initiative to take some time in bearing fruit, it is definitely a tailwind for long term Emerson operating margins as the company cuts out a mediator on some portion of sales. I believe this is a good start that should be viewed as a positive for the stock.
Strong Balance Sheet
The company’s solid balance sheet, consistently high FCF generation, and goal of returning a sizeable 50%–60% of its operating cash flow to shareholders are also positives. Going forward, I believe high FCF generation, and management’s aggressive stance on returning capital to shareholders through dividends and share repurchases will continue to gain traction among investors.
Low Valuation
The following table summarizes the expected EPS growth next year, dividend yield and forward PE of Emerson and its peers group of GE, ABB, and Caterpillar:
|
Company |
Expected EPS growth (next year) |
Dividend Yield |
Forward PE |
|
General Electric |
12.34% |
3.08% |
12.78 |
|
ABB |
19.71% |
2.42% |
12.21 |
|
Caterpillar |
9.15% |
2.23% |
8.87 |
|
Emerson |
10.98% |
3.21% |
13.32 |
Currently, Emerson is trading at premium valuation among its peers even though the estimated EPS growth is relatively less. I believe the company’s premium valuation from Caterpillar and GE is justified given the fact that the visibility over automation segment is high and Emerson has higher exposure than its peers in this segment. Also, Emerson offers highest dividend yield among its peers which I believe attributes to discounted valuation of ABB. The company’s valuation seems irrefutable on relative basis, but on an absolute basis, I believe that the company is little undervalued given in the last five years the company’s average P/E ratio has been closer to 15 and currently has better fundamentals than before.
Looking forward, I believe Emerson’s late-cycle Industrial Automation and Process businesses are well positioned to benefit from any pickup in global capex across several markets, including in Oil & Gas and Power. I expect the company’s growth in emerging market, strong balance sheet, and focus on E-commerce to provide potential upside in earnings in the long term. Thus, I recommend it a buy.
Interested in Additional Analysis?
Caterpillar is the market share leader in an industry in which size matters, and its quality products, extensive service network, and unparalleled brand strength combine to give it solid competitive advantages. Read all about Caterpillar's strengths and weaknesses in The Fool's brand new report. Just click here to access it now.
ankitagrawal has no positions in the stocks mentioned above. The Motley Fool owns shares of ABB. Motley Fool newsletter services recommend ABB and Emerson Electric Co.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
