Please ensure Javascript is enabled for purposes of website accessibility

5 Takeaways From Emerson Electric's Investor Conference

By Lee Samaha - Mar 4, 2016 at 10:14AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The industrial company is a lot more attractive for investors than its headline numbers suggest.

Any presentation from Emerson Electric (EMR 0.41%) CEO David Farr usually contains some straight talk -- you would want nothing else from a business leader -- and the company's Investor Conference presentation provided just that. Farr offered detailed color commentary on the company's future, and the key conclusions from his talk gave succor to the bullish thesis for the stock. Here's how and why.

1. Emerson is not cutting its dividend
Emerson's current dividend yield of nearly 4% is obviously attractive to income-seeking investors, but is it sustainable? The concerns on the issue relate to the company's deteriorating earnings outlook and the fact that free cash flow decreased from $2.93 billion in 2014 to $1.84 billion in 2015. Moreover, the intended spinoff or sale of its network power business will reduce cash flow generation.

Clearly, these fears are overblown, because Farr was unequivocal in declaring the dividend wouldn't be cut. He has good reason to be. For example, part of the reason for the free cash flow decline in 2015 was that Emerson paid $500 million in taxes on divestitures. Moreover, Farr's forecast for 2016 is for $2.38 billion in free cash flow, a figure 1.9 times the 2015 dividend payout. 

2. Orders are set to improve
On the previous earnings call, Farr outlined his expectation for Emerson's three-month rolling order book to turn positive in April. As you can see in the graphic below, he reiterated this in the presentation. In addition, underlying sales growth is expected to turn positive on a year-over-year basis in the third and fourth quarters.


In other words, a snapshot of the company in the third quarter would show a company with positive order growth behind it and sales growing again. The market tends to reward such companies.

3. Outlook seems conservative
Furthermore, Farr's outlook is arguably based on a conservative outlook for 2016. The following graphic shows how Emerson's forecast for gross fixed investment in 2016 is below that of respected business analysts IHS.


Moreover, the company's guidance for positive year-over-year underlying sales growth is not dependent on the upward-trending growth forecast that IHS is giving. In other words, if the IHS forecast turns out to be right, it's reasonable to expect greater upside potential than Emerson's sales and earnings forecasts indicate.

4. End market demand is steady outside oil and gas
It's no secret that Emerson Electric has suffered due to its oil and gas exposure, and conditions aren't likely to get much better anytime soon. However, a look at its  end markets outside of the oil and gas space shows that, other than metals and mining, the company's end markets are set for flat to positive growth in 2016.

Of particular note is the positive outlook given for machine automation. Among the items Emerson lists as potential growth drivers over the next four years: "Automotive demand continues at moderate pace; Increased packaging equipment demand for food & beverage."

In fact, its only negative end market in process management is set to be oil and gas. Similarly, within the commercial and residential solutions segment, the only negative end market is also oil and gas. Meanwhile, climate technologies looks set for low growth all around.

5. Upside from reorganization 
Investors will also have some upside from corporate action to look forward to in 2016. Emerson's plan is to spin off or sell its network power segment, and sell its motors and drives, power generation, and storage businesses. What is left will then be reorganized into two segments: automation solutions (the existing process management segment and the remainder of industrial automation) and commercial and residential solutions (the existing business plus climate technologies).

Here are some keys facts about the post-reorganization Emerson:

  • The new business is forecast to generate $15 billion in sales in 2016 compared to $20 billion to $21 billion for the existing business.
  • Forecast 2016 EBIT margin for the new business of 18.3% compared to 15.4% for the existing business.
  • New business automation solutions forecast to comprise 64% of 2016 sales with commercial and residential solutions generating the remaining 36%.
  • New business is intended to have a higher growth profile.
  • The new business will be seeking acquisitions in order to help drive revenue growth.

In a nutshell, the new business will be smaller but higher-margin, and boast a better growth profile--something investors might warm too.

Looking ahead
All told, provided conditions don't worsen in the oil market and the economy holds up, Farr's presentation suggests Emerson Electric will be an attractive stock for income seekers. If all goes to plan, the company will start reporting sales growth by the end of the year, and its corporate restructuring will create a new company with a higher growth and margin profile -- and of course, an uncut dividend.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Emerson Electric Co. Stock Quote
Emerson Electric Co.
$83.64 (0.41%) $0.34

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/23/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.