EMR - Emerson Electric Co.: The Development Of NI Will Be Key To Watch

2023-06-10 03:28:00 ET

Summary

• Emerson Electric Co. offers a solid investment opportunity due to its exposure to renewable energies, chemical production, and acquisitions such as NI.
• EMR's strong balance sheet, growing cash flows, and share buybacks make it an attractive long-term investment with a 2.47% dividend yield.
• Risks include maintaining margins and ensuring acquisitions like AspenTech contribute positively to the company's growth and cash flow.

Investment Rundown

Emerson Electric Co. (EMR) is a solid opportunity for investors seeking exposure to the growing demand for transitioning into renewable energies and the increasing need for larger stable chemical production and making them more efficient. EMR plays the role here as a solutions provider, even selected by QatarEnergy and Chevron Phillips Chemical for the world-scale chemical factories. But EMR is also providing the software for 30% hydrogen fuel plants that are transitioning into 100% hydrogen.

With diversified end markets EMR is also ensuring its growth by acquiring companies, just recently announcing the acquisition of NI. These moves are solidifying the market position of EMR and ensuring they will continue to generate strong FCF. With growing cash flows comes more opportunity to buy back shares, which the company has done efficiently. In my view, EMR offers investors a good place to invest capital and collect value through both dividends and buybacks. I am rating EMR stock a buy at these prices.

Markets They Are In

As mentioned before, EMR has solid exposure to several markets as it is a solutions provider that can be adapted to different business needs efficiently. Some of the tailwinds EMR is seeing is the energy transition speed increasing but also the growing investments into greenfield in both Asia but also the US.

Something that has been on many people's minds is EV. The need for lithium here is immense as the batteries made from it are in every EV car out there. With strong investments into opening up mines for this commodity EMR is seeing demand for their solutions as they help make the operations more efficient and cost-effective.

The acquisition of NI (NATI) also opened up new markets for EMR to gain exposure to and heavily strengthen its portfolio of acquisitions. As NI is a global test & measurement leader, EMR now has exposure to a $35 billion TAM which they can tap into to grow revenues for the business. Much of the growth there will come from demand in the semiconductor industry but also aerospace and defense. After the acquisition, it will be interesting to see the impact it will have on the overall FCF for EMR. As they bought AspenTech it helped contribute $129 million in FCF for Q2 of 2023, or nearly 25% of the total FCF.

Earnings Highlights

Looking at the last quarter for EMR, sales grew by 14% YoY, fueled by the growing demand seen across several end markets. The share price for EMR has been battered over the last 12 months, as it's down around 7% right now, and far off the highs of $98 per share it had back in January. But I think the results of Q2 for 2023 are given some optimism about the prospects of the company. The EBITDA margins growing 320 bps YoY, and EMR is continuing its strong uptrend in margin expansion.

With strong guidance for 2023, I think the current p/e of around 20 seems like a great entry point. EMR sees cash flows coming in at $2.2 billion and that they will complete the $2 billion share repurchase plant as well, which also distributes $1.2 billion in dividends. This I think is where a lot of investors will be looking in the coming years. An announcement of a new share buyback program and a raise to the dividend will help solidify the long-term investment opportunity of EMR.

As for me, I will be keeping an eye on the margin expansion of the company in the coming quarters as well as how AspenTech is performing. EMR did lower the FCF guidance for AspenTech as well as the revenues. This is perhaps a little concerning and I think a further lowering or disappointment could send the shares tumbling.

Risks

The major risk with EMR right now seems to be that they can't maintain margins. As AspenTech is taking a hit, investors might view it as a disappointing acquisition and more of a liability rather than a growth opportunity. If that is the case a quite steep drop in the sales price might happen to reflect this pessimism from the market.

In my own opinion, I think AspenTech will need to be sort of a guiding light for EMR as it will prove the effectiveness of their acquisitions, just like with the recently announced NI buyout. As EMR is building out its portfolio they also need to ensure they are generating strong cash flows that can support a growing dividend and a buyback program. Otherwise, investors might see better opportunities elsewhere.

Financials

A lot of the strength of EMR is visible on the balance sheet. The company has a cash position of above $2 billion which can make a significant impact on the long-term debts of $8 billion and paired with strong FCF the financial position of EMR seems stable and highly leveraged in order to further fund acquisitions and strengthen their portfolio.

Where I see some inflation in the balance sheet is the goodwill for the company. With the acquisition the goodwill nearly doubled to $14 billion. The same can't be said for other parts of the balance sheet like the cash position or the inventory for the company.

Even though the debts sit at above $8 billion its net debt/EBITDA is just under 2 right now, which makes me confident that EMR won't struggle to pay back debts, or at least I think it will be quite unlikely. Where the debts will need to be further supported is the cash flow for the company. Expected to be around $2.2 billion for 2023, this will play a big role in EMR's ability to grow their portfolio but also the balance sheet with more acquisitions.

Final Words

I think EMR is setting itself apart right now by being very proactive with strong acquisitions and expanding its exposure to some key markets. With the purchase of NI, it will be interesting to watch the coming quarters and how EMR is able to strengthen its margins and FCF if possible. As for my view on the company I see them as a solid long-term investment right now. The company is diverting a lot of capital to shareholders and has an intriguing dividend yield of around 2.47% right now. Paying 20x forward earnings whilst they are growing sales by 20% seems fair as well. The broadscale tailwinds seen across the many markets they are in are making EMR out to be almost like investing in a fund, which I am not opposed to. The quality of the business and their eagerness to expand makes me rate EMR a buy right now.

For further details see: