Is This Company Truly Electric?

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a great way to gain a detailed and thorough perspective on a company and its future. As 2012 draws to a close, I would like to focus on a leading manufacturer of electric motors and fans: Emerson Electric Company (NYSE: EMR).

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Strengths:

  • Steady Revenue Growth: In 2007, Emerson reported revenue of $22.57 billion; in 2012, the company announced revenue of $24.41 billion, representing year over year annual growth of 1.58%, a trend that is anticipated to continue into the future, with projections placing 2017 revenue at $31.74 billion. This is mostly due to innovative offerings and an increase in business' desire to remain competitive in their industries

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  • Dividend: Emerson currently pays out quarterly dividends of $0.41, which puts the dividend as yielding 3.15% annually
  • Institutional Vote of Confidence: 72% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future
  • Reasonable Valuation: At the moment Emerson carries a price to earnings ratio of 19.47, a price to book ratio of 3.70, and a price to sales ratio of 1.56, all of which point to a company trading with a reasonable valuation

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  • Cash & Equivalents: Emerson Electric currently possesses $2.37 billion of debt on their balance sheets, a major upside to the business

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  • Wide Reach Across Multiple Industries: Emerson operates across several distinct industries, from network power, climate technologies, process management, industrial automation, and commercial & residential solution. This gives the company greater predictability and diversification

Weaknesses:

  • Debt: Emerson currently possesses $3.78 billion of debt on their balance sheets, a major downside to the business; much of this debt has been accumulated through Emerson's reach into emerging markets

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  • Single Digit Margins: At the moment Emerson carries a net profit margin of 8.06%, which is below the ideal double digit range and leaves little room for unexpected expenditures
  • Margin Compression: Over the past 5 years revenue has greatly outgrown earnings, representing margin compression, an ominous sign; this margin compression has resulted from Emerson struggling to lure business spending in this weak economic landscape

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  • Operating Expenses: When a company expands such as Emerson’s has, the costs related to running that business will also grow, and over the past years operating expenses have outgrown revenues, a troubling sign

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Opportunities:

  • Dividend Growth: Since implementing their dividend program in 1947, Emerson Electric has consistently raised their dividend payouts, and this trend is widely anticipated to continue into the future

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  • Network Power: One of the sectors that offers significant opportunity is network power, as $426 billion in annual costs is related to data center outages, and Emerson is working towards building technology that sustains power and saves money. Emerson has worked with Chile to build a mobile communications network that will provide at least 48 hours of backup power at cell sites
  • Climate Technologies: Due to inadequate cold-chain infrastructure, nearly half of all fruits and vegetables spoil in developing nations. Emerson provides Copeland Scroll compressors, which can offer significant savings and potential growth, especially in developing nations
  • Process Management: Emerson projects 96% of global energy demand growth will come from emerging economics by 2030, and Emerson is well positioned to take advantage of this growth with plant automation and control technologies that allow manufactures to achieve more efficient, productive, and safe operations

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Threats:

  • Competition: In the several industries Emerson operates in, the company faces severe competition, and the battle to offer the best product for the least amount of money can lead to margin compression
  • Slowdown in Business Spending: The majority of Emerson’s revenue is derived from businesses reinvesting or streamlining their operations, and if spending by business was to slow because of uncertainty about their future, Emerson’s business would be hurt

Competition:

Major publicly traded competitors of Emerson Electric include Honeywell International (NYSE: HON), General Electric (NYSE: GE), AMETEK Incorporated (NYSE: AME), and Dover Corporation (NYSE: DOV). All of these companies offer products and services that compete with Emerson’s offerings. Honeywell is valued at $49.29 billion, pays out a dividend yielding 2.61%, and carries a price to earnings ratio of 21.09. General is valued at $214.34 billion, pays out a dividend yielding 3.72%, and carries a price to earnings ratio of 15.17. AMETEK is valued at $9.01 billion, pays out a dividend yielding 0.65%, and carries a price to earnings ratio of 20.45. Finally, Dover is valued at $11.60 billion, pays out a dividend yielding 2.16%, and carries a price to earnings ratio of 13.98.

The Foolish Bottom Line:

Emerson Electric is a major player in several industries, and is relatively strong financially. The company possesses strong revenue growth, a growing dividend, and a sizable pile of cash that nearly offsets the company’s debt load. Additionally, the company’s future is filled with potential growth fueled by developing markets. All in all, while Emerson is financially solid, the company does not possess a caliber of growth worthy of investment in the current economic environment.


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool owns shares of General Electric Company. Motley Fool newsletter services recommend 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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