Emerson Electric Stock Is Down 20% This Year, Despite Strong Fundamentals. Time To Buy?

by Trefis Team
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Emerson Electric (NYSE: EMR), a diversified industrial company that is best known for its automation solutions, has seen its stock underperform, falling by about 21% year-to-date, compared to the broader S&P 500 which is down by about 5%. Emerson stock has lagged over the last few years as well, falling from around $65 in early 2018 to $61 currently. This decline comes despite the fact that the company’s revenues have grown by about 20% between 2017 and 2019, with net margins also expanding from 10.2% to 12.7% over the same period. Does this make sense? We don’t think it does and believe that Emerson’s stock could be attractive at current levels. Our dashboard What Factors Drove -6.4% Change In Emerson Electric Company Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

Emerson Electric Stock Has Declined Since 2018, Despite Solid Improvement To Fundamentals

Emerson’s revenues expanded by about 20% between 2017 and 2019, rising from around $15.3 billion to $18.4 billion. Net income grew from around $1.6 billion to around $2.3 billion, driven by an expansion of net margins from around 10.2% to 12.7%. Earnings growth, on a per-share basis, was slightly higher, as the company’s share count declined by about 4% to 616 million. However, the markets have assigned a lower valuation to Emerson, with its P/E multiple declining from around 28x in 2017 to a little over 16x currently, despite the strong growth in its revenue and earnings.

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity.  The U.S. economy contracted by close to 5% in Q1 and is expected to see a sharper decline in Q2. Emerson is likely to see demand for its industrial automation systems drop, as companies scale back on capital expenditure through this year, while its customers in the oil and gas space also revisit spending plans due to volatile hydrocarbon prices. The company has acknowledged that 2020 will be tough, noting that the recovery over 2021 could also be somewhat slow. 

That said, we believe the long-term outlook for the company remains robust making the stock attractive at current levels. Process automation is crucial for manufacturing companies to cut manpower costs and boost margins and Emerson, being a leader in this space, should stand to benefit meaningfully as the global economy recovers. Separately, the company’s Commercial and Residential Solutions business, – which sells air conditioning and refrigeration products and accounts for 35% of total revenue, could hold up better, supporting overall revenues. Moreover, the company’s reasonable cash balance and manageable debt levels should enable it to sail through the current recession without undue risk. Our dashboard Does Emerson Electric Have Sufficient Cash To Weather The Covid Recession? provides more details on the company’s cash position through the pandemic, after accounting for revenue declines, fixed costs, interest, dividend, and other commitments.

Is industrial behemoth General Electric, down 40% this year, a better bet than Emerson Electric? Find out in our dashboard analysis What Factors Drove General Electric Stock Between 2018 And Now?

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