Having raised its dividend for the last 60 years, Emerson Electric (EMR -0.02%) is an income-seeking investor's favorite. It's also a stock with excellent growth prospects and trading on favorable absolute and relative valuations. Here's why the stock deserves a look in the current environment.
Introducing Emerson Electric
With $18.2 billion in sales in 2021, Emerson Electric is a company combining automation solutions ($11.6 billion in 2021 sales) and commercial and residential solutions ($6.6 billion) businesses. The latter business combines heating, ventilation, and air conditioning (HVAC) solutions (climate technologies having had $4.7 billion in sales in 2021) and tools for professionals and homeowners (tools and home products having had $1.9 billion in sales in 2021).
The commercial and residential businesses are attractive for their exposure to the HVAC market. However, the automation solutions segment is the key to the investment case for the stock. Within automation solutions, Emerson offers measurement and analytical instrumentation (to help monitor the processing of raw materials in process automation), valves, actuators and regulators (controlling and regulating the flow of raw materials), and pneumatic mechanisms. In addition, Emerson Electric owns 55% of the industrial software company AspenTech.
The following breaks out Emerson's overall sales by end market. Of particular note are the upstream oil and gas business at 11%, midstream oil and gas at 6%, chemical at 10%, discrete and industrial at 10%, and refining at 6%.
|
Emerson Electric |
Sales by End Market in 2021 |
|---|---|
|
Upstream oil and gas |
11% |
|
Midstream oil and gas |
6% |
|
Residential |
16% |
|
Chemical |
10% |
|
Power |
10% |
|
Commercial |
9% |
|
Discrete and industrial |
10% |
|
Cold/chain refrigeration |
7% |
|
Refining |
6% |
|
Life science and medical |
3% |
|
Other |
12% |
Data source: Emerson Electric SEC filings.
The investment case for buying Emerson Electric stock
The company is often seen as an industrial stock with heavy exposure to energy prices. Historically, that means Emerson's stock price tends to follow the trend in the price of oil.
Data by YCharts
However, that's something that might concern investors. After all, with the economy seemingly making a clean energy transition, many investors are seeking to avoid companies with heavy exposure to fossil fuels. That said, CEO Lal Karsanbhai knows where he wishes to direct the company. He said on the company's second-quarter 2022 earnings call, "I should state that our perspective on energy remains unchanged. We will continue to divest commoditized upstream oil and gas businesses."
Emerson Electric is finding itself in a position where growth prospects (including upstream oil and gas) are receiving a boost from high energy prices in the near and medium terms. However, if Karnsanbhai's plans to divest upstream oil and gas businesses are realized, investors won't be exposed to an industry facing long-term growth challenges.
Moreover, the high price of oil creates investment in cleaner energy sources. Finally, Karsanbhai discussed trading conditions in the automation solutions segment, saying, "I expect to see continued investments in key regions and decarbonization initiatives."
As oil prices rose, we saw more activity around key energy segments such as LNG, clean fuels, and renewables." Indeed, the automation solutions segment's orders rose 17% on a three-month trailing basis to March, helping total company orders grow 13%.
Looking ahead
The company offers investors potential upside from high energy prices without the angst of holding a stock committed to an industry (upstream oil and gas) that may face significant long-term challenges. Fortunately, the current high price of oil should help Karsanbhai finesse an exit from these businesses at attractive prices.
Moreover, with the stock trading on 17 times the estimated free cash flow in 2022 and yielding 2.4%, it presents a useful option for income-seeking investors looking for exposure to rising commodity prices.
