Emerson Electric Co. (EMR 2.13%) is one of those large-cap industrial stocks whose prospects are always likely to follow the direction of the economy. Of course, this isn't a bad thing, but Foolish investors will wonder if there is a reason to buy the stock rather than one of its peers like General Electric Company (GE 1.18%), Rockwell Automation (ROK 0.36%), or Ingersoll-Rand (IR 1.23%)?
What Emerson Electric Co. offers investors
Given its $47 billion market cap and sprawling set of industrial businesses, the company's fortunes will inevitable rise and fall with the global industrial economy. Having said that, the stock is still attractive for a lot for investors. Emerson Electric is a relatively mature business that has tended to convert around 13.5% of its revenue into operating cash flow over the last three years. Moreover, its management promises to pay back between 50%-60% of cash flow to investors this year, so you can quickly understand the investment proposition Emerson Electric offers. It's not a stock to set the world on fire, but working off the assumptions above (and analysts' revenue consensus of $24.85 billion for 2014) would see the company returning around 3.7% of its enterprise value to shareholders this year -- not too shabby. In addition, the current dividend yield is around 2.6%.
Meanwhile, it has the prospect to generate earnings growth -- outside of general industrial growth -- by making acquisitions and operational improvements, and selling off underperforming businesses.
Diversified growth
Of course, Emerson is not alone in having such qualities -- but the difference is that its end market exposure is a lot broader than that of a company like General Electric.
| Segment (2013 share of earnings) |
Key Sectors |
North America |
Asia |
Europe |
Underlying Growth Guidance |
|
Process management (42.5%) |
Oil and gas, chemical, power |
37% |
25% |
20% |
4%-5% |
|
Network power (13%) |
Data center, service, telecom |
42% |
29% |
18% |
1%-3% |
|
Industrial automation (18.2%) |
Factory automation, distributed power, process |
41% |
17% |
35% |
2%-4% |
|
Climate technologies (16.8%) |
Residential HVAC, core refrigeration, commercial HVAC |
55% |
23% |
12% |
1% |
|
Commercial & residential solutions (9.5%) |
Plumbing, storage |
83% |
4% |
8% | -- |
| Total |
3%-5% |
Source: Company presentations
For ease of reference, the industries mentioned in the table are those that contribute above 10% of the segment's revenue. Oil and gas (42% of process management revenue) probably represents Emerson Electric's most important industry vertical. However, contrast this with General Electric Company, which generated more than 30% and 26% of its industrial earnings last year from power and water and aviation, respectively.
Rockwell Automation is probably a better comparison in terms of end markets, but the company is more of an industrial automation play. In fact, Emerson Electric is believed to be a potential acquirer of Rockwell, partly because Rockwell's automation solutions would be a good fit with Emerson's industrial automation. Similarly, Emerson may compete with Ingersoll-Rand in its climate technologies segment, but Ingersoll-Rand generated more than two-thirds of its operating income from climate control in 2013. The latter is more exposed to construction markets.
In other words, if you are looking for an industrial stock to capture strength in a particular industry then Emerson Electric isn't really what you are looking for. However, from a risk perspective, with Emerson Electric you are not going to miss out on a general upside move in the industrial sector.
Is Emerson Electric a buy in 2014?
All told, Emerson's forecast of 3%-5% growth mirrors Rockwell Automation's forecast of 3%-6%. Moreover, when looking at both stocks, an investor is going to have to take a view on global growth. The interesting aspect -- as outlined in Emerson Electric's conference call -- is that Europe is forecast to have a relatively better year in 2014 than in recent years, and this should counter balance the downside risk in emerging markets.
In other words, increased European demand should aid emerging market exports, even as countries like China see growth levels slowing. Ultimately, it is these kinds of macroeconomic considerations that will govern whether you should consider buying Emerson Electric or not.
