IT Hardware Stocks

Emerson Electric Co Valuation – April 2019 #EMR

Company Profile (excerpt from Reuters): Emerson Electric Co., incorporated on September 24, 1890, is a diversified global manufacturing company, which provides solutions to customers by bringing technology and engineering together in the industrial, commercial and consumer markets around the world. The Company operates through four segments based on the nature of the products and services rendered: Process Management, Industrial Automation, Climate Technologies and Commercial & Residential Solutions. The Company’s principal production operations are electronics assembly, metal stamping, forming, casting, machining, welding, plating, heat treating, painting and assembly. In addition, the Company uses specialized production operations, including automatic and semiautomatic testing, automated material handling and storage, ferrous and nonferrous machining, and special furnaces for heat treating and foundry applications.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of EMR – April 2019

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $42,765,260,725 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.88 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 7.18% Fail
6. Moderate PEmg Ratio PEmg < 20 21.78 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 5.28 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 0.88 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -2.99 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Fail

 

Stage 2: Determination of Intrinsic Value

EPSmg $3.19
MG Growth Estimate -0.32%
MG Value $25.12
Opinion Overvalued
MG Grade C
MG Value based on 3% Growth $46.32
MG Value based on 0% Growth $27.15
Market Implied Growth Rate 6.64%
Current Price $69.58
% of Intrinsic Value 277.00%

Emerson Electric Co. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of earnings growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $3.26 in 2015 to an estimated $3.19 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 6.64% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Emerson Electric Co. revealed the company was trading above its Graham Number of $33.94. The company pays a dividend of $1.94 per share, for a yield of 2.8%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 21.78, which was below the industry average of 35.4, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-8.75.

Emerson Electric Co. receives an average overall rating in the ModernGraham grading system, scoring a C.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$8.75
Graham Number $33.94
PEmg 21.78
Current Ratio 0.88
PB Ratio 5.28
Current Dividend $1.94
Dividend Yield 2.79%
Number of Consecutive Years of Dividend Growth 20

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2018
Total Current Assets $6,658,000,000
Total Current Liabilities $7,540,000,000
Long-Term Debt $2,641,000,000
Total Assets $20,429,000,000
Intangible Assets $9,182,000,000
Total Liabilities $12,153,000,000
Shares Outstanding (Diluted Average) 627,800,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $3.60
Sep2018 $3.46
Sep2017 $2.35
Sep2016 $2.52
Sep2015 $3.99
Sep2014 $3.03
Sep2013 $2.76
Sep2012 $2.67
Sep2011 $3.27
Sep2010 $2.84
Sep2009 $2.27
Sep2008 $3.06
Sep2007 $2.66
Sep2006 $2.24
Sep2005 $1.70
Sep2004 $1.49
Sep2003 $1.30
Sep2002 $0.15
Sep2001 $1.20
Sep2000 $1.65
Sep1999 $1.50

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $3.19
Sep2018 $3.02
Sep2017 $2.84
Sep2016 $3.06
Sep2015 $3.26
Sep2014 $2.91
Sep2013 $2.82
Sep2012 $2.84
Sep2011 $2.89
Sep2010 $2.67
Sep2009 $2.52
Sep2008 $2.50
Sep2007 $2.11
Sep2006 $1.68
Sep2005 $1.32
Sep2004 $1.14
Sep2003 $1.03

Recommended Reading:

Other ModernGraham posts about the company

Emerson Electric Co Valuation – June 2018 $EMR
Emerson Electric Co Valuation – August 2017 $EMR
Emerson Electric Co Valuation – February 2016 $EMR
5 Speculative and Overvalued Companies to Avoid – January 2015
15 Companies in the Spotlight This Week – 12/27/14

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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