What happened
Automation and climate technologies company Emerson Electric (EMR -0.46%) just completed an unusual year, with the stock only gaining 15.7%. I write "only" because the S&P 500 index gained 27%, and it's somewhat surprising that Emerson underperformed the market, considering that it significantly beat its initial earnings guidance for its fiscal 2021 and has guided toward a 19% increase in earnings for its fiscal 2022.
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For reference, management started its fiscal 2021 (its fiscal years end on Sept. 30) expecting full-year underlying sales growth in the range of negative 1% to positive 2%. It actually came in at 5%. As a result, its adjusted earnings per share came in at $4.10, significantly ahead of the $3.45 it initially guided for on that metric.
Management's fiscal 2022 guidance calls for underlying growth of 6% to 8% in its automation solutions segment, and 6% to 9% in its commercial and residential solutions segment, leading to overall underlying sales growth of 6% to 8%.
So what
In a nutshell, the market appears to have taken a relatively dim view of Emerson Electric's prospects because of the margin pressures created by soaring costs for raw materials such as steel, and concerns about the company's exposure to upstream oil and gas spending.
However, on its fiscal fourth-quarter earnings call, management said that price cost will shift during the second half of 2022 and that it's expected to be an approximately $100 million tailwind for the year. Moreover, CEO Lal Karsanbhai told investors the company would "continue to divest upstream oil and gas hardware assets."
Karsanbhai is also pushing Emerson Electric toward growing its software capabilities by investing $6 billion in process industry software company Aspen Technology (AZPN) and contributing Emerson's software business for a 55% stake in Aspen.
Now what
As of the end of its fiscal fourth quarter, Emerson's three-month trailing orders were up 16%, a figure that suggests its guidance for underlying sales growth of 6% to 8% is conservative. Moreover, it has long been a highly cash-generating company with $3 billion in free cash flow in 2021 and another $3.1 billion forecast for 2022. The latter figure easily covers Emerson's $1.2 billion in annual dividend payments. And Emerson is a Dividend Aristocrat and King with a 65-year streak of annual payout hikes.
That kind of free cash flow should give Karsanbhai the financial flexibility to restructure the company for growth. Trading at slightly more than 18 times its estimated 2022 free cash flow, Emerson's stock looks a good value.
