Stocks

ModernGraham Valuation: Emerson Electric Co. (EMR)

moneyCompany Profile (obtained from Google Finance): Emerson Electric Co. (Emerson) is a diversified global technology company. The Company is engaged in designing and supplying products and technology, and delivering engineering services and solutions in a range of industrial, commercial and consumer markets globally. The Company operates in five business segments: Process Management, Industrial Automation, Network Power, Commercial and Residential Solutions, and Climate Technologies. The Company’s production operations are electronics assembly, metal stamping, forming, casting, machining, welding, plating, heat treating, painting and assembly. In April 2012, it acquired the Marine Container and Boiler business of Johnson Controls, Inc. In September 2012, it sold Knaack, L.L.C. to Werner Co. In October 2013, Emerson Electric Co acquired Enardo LLC. In November 2013, the Company sold 51% interest in its computing and power business to Platinum Equity.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $31.78
MG Opinion Overvalued
Value Based on 3% Growth $40.28
Value Based on 0% Growth $23.61
Market Implied Growth Rate 7.73%
NCAV -$4.43
PEmg 23.97
Current Ratio 1.44
PB Ratio 4.44

Balance Sheet – 9/30/2013 

Current Assets $10,999,000,000
Current Liabilities $7,625,000,000
Total Debt $4,055,000,000
Total Assets $24,711,000,000
Intangible Assets $9,181,000,000
Total Liabilities $14,126,000,000
Outstanding Shares 706,660,000

Earnings Per Share

2013 $2.76
2012 $2.67
2011 $3.24
2010 $2.60
2009 $2.27
2008 $3.11
2007 $2.66
2006 $2.24
2005 $1.70
2004 $1.49
2003 $1.20
2002 $1.28

Earnings Per Share – Modern Graham 

2013 $2.78
2012 $2.78
2011 $2.82
2010 $2.60
2009 $2.53
2008 $2.52

Conclusion:

Emerson Electric Co. is a stable company, but does not appear to have much opportunity for value investors to profit at this time.  The company does not qualify for either the Defensive Investor or the Enterprising Investor as it has too much current liabilities for either investor type and is currently trading at high PEmg and PB ratios.  Investors should be very thorough when doing further research if they are considering investing in Emerson at this time.  One suggestion for further research would be to review the ModernGraham Valuation of General Electric (GE) and the ModernGraham Valuation of Dover Corporation (DOV).  As far as the valuation, Emerson Electric has not had a lot of growth, having brought EPSmg from $2.52 in 2008 to $2.78 for 2013.  The market is currently implying a growth rate of 7.73%, which is well above what has been seen historically and would indicate the company is overvalued at this time.

What do you think?  Do you agree that Emerson Electric Co. is overvalued?  Is the company not suitable for Defensive Investors and Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Emerson Electric Co. (EMR) at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill

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