Emerson Electric Co.

Date: July 06, 2024.

Company’s Overview

Emerson Electric (EMR) is a global manufacturing company headquartered in Missouri. They design and sell a wide range of products and services for industrial, commercial, and consumer markets, including automation technologies, valves, temperature measurement tools, and tools for professional trades.

Competition

Emerson Electric operates within the Electrical Components and Equipment industry, which is composed by:

Revenue Segments

The Company’s net sales proportions by segment for the most recent quarterly report are composed by:

The Company’s Comparison of total net revenues by segment from 2019 till 2023:

Related Risks

Emerson Electric faces several challenges that threaten its long-term health. Despite growing revenue, their struggle to translate that growth into profit raises concerns about their business model’s efficiency. Their high dividend payout, significantly exceeding free cash flow, suggests prioritizing short-term payouts over reinvestment, potentially hindering future innovation. Competition in the automation and industrial technology sectors is fierce, demanding constant improvement to maintain market share. A global economic downturn or supply chain disruptions could further strain their business. Additionally, their below-average ROIC indicates a need to better utilise capital.

Financial Performance

Revenues

Revenues from 2020 to 2023:

• EMR’s annual revenue for 2023 was $15.17B, a 9.86% increase from 2022.
• EMR’s annual revenue for 2022 was $13.8B, a 6.74% increase from 2021.
• EMR’s annual revenue for 2021 was $12.93B, a -22.96% decrease from 2020.
• EMR’s annual revenue for 2020 was $16.79B, a -8.64% decrease from 2019.

The yearly revenue from 2009 till 2023 is:

**The 2024 and 2025 values are the expected by the analysts

Net Income

Net Income from 2020 to 2023:

• EMR’s annual net income for 2023 was $13.22B, a 309.13% increase from 2022.
• EMR’s annual net income for 2022 was $3.23B, a 40.3% increase from 2021.
• EMR’s annual net income for 2021 was $2.3B, a 17.2% increase from 2020.
• EMR’s annual net income for 2020 was $1.97B, a -14.79% decrease from 2019.

The yearly net income from 2009 till 2023 is:

**The 2024 and 2025 values are the expected by the analysts

EPS

EPS from 2020 to 2023:

• EMR’s annual EPS for 2023 was $23.02B, a 322.39% increase from 2022.
• EMR’s annual EPS for 2022 was $5.45B, a 41.56% increase from 2021.
• EMR’s annual EPS for 2021 was $3.85B, a 18.1% increase from 2020.
• EMR’s annual EPS for 2020 was $3.26B, a -12.83% decrease from 2019.

The yearly EPS from 2009 till 2023 is:

**The 2024 and 2025 values are the expected by the analysts

Free Cash Flow

Free Cash Flow from 2020 to 2023:

• EMR’s annual free cash flow for 2023 was $0.27B, a -89.55% decrease from 2022.
• EMR’s annual free cash flow for 2022 was $2.62B, a -17.28% decrease from 2021.
• EMR’s annual free cash flow for 2021 was $3.17B, a 24.6% increase from 2020.
• EMR’s annual free cash flow for 2020 was $2.55B, a 5.51% increase from 2019.

The yearly free cash flow from 2009 till 2023 is:

**The 2024 and 2025 values are the expected by the analysts

Financial Strength

Shares Outstanding

In March 2020, EMR’s board authorised a share repurchase program of up to 30M of its common shares.

A positive aspect is the substantial decrease in outstanding shares by almost 25% since 2009. This aggressive share buyback program minimises shareholder value dilution and benefits investors through potentially increased earnings per share (EPS).

Assets/Liabilities

Their asset-to-liability ratio of 2.36 falls comfortably in the very good range, indicating they have more than enough assets to cover their liabilities. This provides a strong financial buffer.

Current Ratio

However, their current ratio of 1.18 sits in the mediocre category. While not a major cause for concern, it suggests they might have limited readily available short-term resources to meet current obligations.

Net Debt

On the bright side, Emerson Electric boasts a very healthy net debt situation. Their net debt of $654 million is a remarkably small amount, especially considering the company’s size and industry. This debt has also seen a significant decrease of nearly 85% since 2019. Furthermore, this modest debt represents a minimal portion (only 3.33%) of their total liabilities, further strengthening their financial flexibility.

Valuation

Based on the analysis performed, EMR’s price is overvalued. As key metrics, we considered 10% Required Rate of Return (RRR) and 20% margin of safety. Note that in the analysis we take into consideration also the cash and cash equivalents and the total debt.

The company has received a range of ratings from buy to sell. Specifically, there were 17 buy, 2 overweight, 5 hold, 0 underweight and 0 sell ratings. The consensus rating leans towards overweight.

Emerson Electric presents a conflicting picture. Financially, they have some strengths. Their net debt position is very healthy, with a significant decrease (84.53%) since 2019, and it represents a small portion of their liabilities (only 3.33%). Additionally, they boast an impressive gross margin (52.19%), exceeding the industry average (37.13%). They’ve also reduced outstanding shares by nearly 25%, contributing to a strong EPS CAGR (22.48%) over the last ten years.

However, these positives are overshadowed by concerning trends. Their profitability metrics paint a worrying picture. Despite a 20% increase in net revenue since 2019, their 10-year CAGR for net income (-1.55%) and free cash flow (-21.39%) are deeply negative. This inability to convert revenue growth into profit raises questions about their business model’s sustainability. Their ROIC of 5.93% falls below the 9% threshold, indicating a struggle to efficiently utilise capital.

While the company’s valuation seems fair based on the P/E ratio (6.13 vs industry median: 23.36), their high dividend payout ratio (1.83% dividend yield, but a payout ratio of 437% of free cash flow) is unsustainable in the long run. This suggests they might be prioritising dividends over reinvestment for future growth.

Overall, Emerson Electric ranks at 72%, a “Not Good” investment opportunity. Their financial strength is decent (good asset-to-liability ratio: 2.36, manageable net debt: $654 million), but their negative profitability trends (negative 10-year CAGR for net income and free cash flow), high dividend payout ratio, and low ROIC raise significant concerns about their long-term viability.

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Disclaimer

Please note that I am not a licensed financial advisor and the information provided here should not be construed as financial advice. I am simply sharing my understanding of the topics based on my research and personal experiences. It is always advisable to consult with a qualified financial advisor before making any investment decisions.

The information I provide is based on publicly available sources and my own interpretations. I strive to provide accurate and up-to-date information, but I cannot guarantee the correctness or completeness of the information.

Any opinions expressed here are my own and do not necessarily reflect the views of any other individual or organisation.

Please use your own judgement and conduct your own research before making any investment decisions.