There's a lot to like about Emerson Electric (EMR -0.63%). After all, it's pivoting toward the attractive markets of automation and industrial software, as its European peers Siemens and ABB are also doing. In addition, management is making a concerted effort to move the company away from upstream oil and gas revenue. Again, something the market might like, but is it all enough to justify buying the stock? Here's the lowdown.
Emerson Electric's strategic direction
Rightly or wrongly, Emerson Electric was always considered an industrial stock with heavy exposure to energy spending. Given that much of energy industry capital spending is led by oil and gas prices, that meant keeping an eye on energy prices was a must for Emerson Electric shareholders.
However, CEO Lal Karsanbhai intends to focus the company on broad-based automation. It's a move he's likely comfortable making, given he was formerly the executive president of Emerson's automation solutions segment until taking over from David Farr in early 2021.
Since then, he's swiftly moved to drive the company in one direction: Automation and the associated industrial software market.
Emerson Electric's changes
Here are some of the highlights of Emerson's transformation:
- Karsanbhai has been clear that he intends "to continue to divest commoditized upstream oil and gas businesses" in a bid to reduce its exposure to upstream oil and gas.
- A series of acquisitions in the industrial software space resulted in Emerson contributing its software business plus cash for a 55% stake in industrial software company AspenTech.
- A series of divestments (such as InSinkErator for $3 billion to Whirlpool and Therm-O-Disc to a private equity firm) and most recently the sale of a 55% stake in its climate technologies business to Blackstone,as Emerson seeks to sell non-core assets.
- The announcement of a takeover bid for National Instruments implies an enterprise value of $7.6 billion for the takeover target, compared to Emerson's enterprise value of $57 billion.
Putting all these things together, it's clear that the industrial company's management is on its way to turning the company into an automation company. To support this migration, on its investor day in November, management outlined four adjacent markets into which it was looking to expand: Industrial software, test and measurement (where National Instruments plays), factory automation, and smart grid solutions.
Why the shift makes sense
Emerson's moves make perfect sense and align with what industrial peers like ABB and Siemens are doing. Automation is an attractive market for two main reasons. First, it allows for processes to be less labor-intensive. That's a plus, not only due to potential cost savings, but it also gives companies the flexibility to shift production away from low labor cost countries -- a significant consideration given how overly complex supply chains have contributed to the supply chain issues many companies have faced in the last couple of years. Second, advances in industrial software and the adoption of digital technology have significantly enhanced the value of automation.
That's why Siemens has its own leading industrial software business, why ABB has partnered with Dassault Systemes why Rockwell Automation has partnered with PTC, and why Emerson has invested in AspenTech.
The growth of industrial software and digital adoption will support growth in automation.
Image source: Getty Images.
Is Emerson Electric a buy?
All of which makes Emerson Electric an attractive investment. Its peer, Rockwell Automation, recently raised its full-year organic sales growth to between 11% and 15% from between 9% and 13%. Emerson's full-year guidance looks more conservative, with underlying sales growth expected to grow by 6.5% to 8.5%, the same guidance as given in November with adjusted earnings per share forecast to be between $4 and $4.15, giving Emerson a forward P/E ratio of 21. That's a reasonable but not overly cheap valuation. Investors may want to wait for a more attractive valuation before entering into a position until there's more clarity on the result of the bid for National Instruments.
