AZPN - Emerson Electric's Automation Advantage

Summary

• Emerson claims that it has transformed into a pure-play automation business.
• The company has an impressive portfolio of market leading businesses.
• However, we have a few concerns about the company's claims.

Emerson Electric ( EMR ) is a leading player in the process manufacturing industry. Investors interested in industrial automation, driven by a labor shortage and reshoring megatrends, should consider Emerson a potential investment.

In this article, we will systematically examine the company’s most important automation products, use cases, and competitive positioning to help readers arrive at a more informed position to assess the risk and rewards of owning the stock. Please refer to our recently published article for a broader discussion of the company's business, risks, financials, and valuation.

Note: This article is for educational purposes only and does not constitute financial or investment advice. Please do your own due diligence and consider your unique financial needs and constraints before buying any stock.

Automation Overview

Following a series of strategic acquisitions and divestitures, Emerson has positioned itself as a leading, pure-play provider of automation solutions. The company boasts a robust portfolio, with a particularly strong presence in the field of process automation. In recent times, Emerson has been focusing on expanding its hybrid and discrete automation business, with the aim of gaining share from industry leaders such as Rockwell Automation (ROK), which holds a dominant position in the field of discrete automation. The company expects ~$8 billion of proceeds from its recent divestitures, and is expected to pursue acquisitions in factory automation, test & measurement, smart grid, and industrial software.

Next, we will explore each of pro-forma Emerson's key brands: AspenTech, DeltaV, Ovation, Rosemount and Fisher.

AspenTech

Emerson acquired a 55% controlling stake in AspenTech ( AZPN ), which still trades in the public market.

AspenTech is a global leader in asset optimization software that optimizes asset design, operations, and maintenance in complex, industrial environments. The company combines decades of process modeling and operations expertise with big data, artificial intelligence, and advanced analytics. Its purpose-built software improves the competitiveness and profitability of its customers by increasing throughput, energy efficiency, and production levels; reducing unplanned downtime, plant emissions, and safety risks; enhancing capital efficiency; and decreasing working capital requirements over the entire asset lifecycle to support operational excellence.

The software combines AspenTech's proprietary mathematical and empirical models of manufacturing and planning processes, reflecting the deep domain expertise the company has amassed from focusing on solutions for the process and other capital-intensive industries for over 40 years. The products have embedded artificial intelligence (AI) capabilities that create insights, provide guidance, and automate and democratize knowledge, known as Industrial AI, to create more value for the process industries. For customers beginning to consider how AI can be applied to their domain-specific challenges, AspenTech recently introduced its hybrid model methodology. This capability enhances first principles-driven models with AI to improve accuracy, safety, and predictability without requiring customers to have additional data science expertise.

AspenTech has developed its applications to design and optimize processes across three principal business areas: engineering, manufacturing and supply chain, and asset performance management. Each business area leverages the company's artificial intelligence of things (AIoT) products as the foundation of industrial data, to help realize its vision for Industrial AI at scale. The company is the recognized market and technology leader in providing process optimization and asset performance management software for each of these business areas.

Emerson's acquisition of AspenTech could have several strategic rationales. Some of the potential reasons include:

1. Complementary Technologies: AspenTech's software solutions are focused on process optimization and asset performance management, which complement Emerson's existing portfolio of industrial automation and control products. By acquiring AspenTech, Emerson could expand its capabilities in these areas, and offer a more comprehensive set of solutions to its customers.

2. Increased Market Share: By acquiring the company, Emerson could gain access to these new markets, and increase its share of the overall automation and control market.

3. Synergy: AspenTech and Emerson's solutions are focused on similar areas, such as process optimization, and both companies have a strong focus on software and analytics. By acquiring AspenTech, Emerson could leverage the company's expertise and solutions to improve its own offerings, and create new opportunities for growth.

DeltaV

Emerson's DeltaV business is a leading provider of digital automation systems for various industrial processes. The DeltaV system is a digital automation system that is used to control and automate processes such as batch processing, continuous processing, and blended product manufacturing. It offers a comprehensive suite of tools for process control, safety instrumented systems, advanced control, data management, asset management, and cybersecurity.

The DeltaV system is widely used in industries such as chemical, oil and gas, pharmaceuticals, and power generation, among others. It meets industry standards and regulatory requirements, making it a reliable and secure choice for industrial automation. Additionally, Emerson provides services such as consulting, engineering and training to help customers optimize their industrial processes and improve performance and reliability over time.

Emerson's DeltaV business is a comprehensive and versatile digital automation system that provides a wide range of features for industrial process control and automation. It's known for being widely used and well-established in the market and have a strong customer base across a variety of industries. Furthermore, the company offers a dedicated customer support team to assist with any needs or concerns.

Competition

Emerson's DeltaV competitors include Siemens SIMATIC PCS 7, Honeywell (HON) Experion, Rockwell Automation PlantPAx, Schneider Electric's (SBGSF) Foxboro DCS, and Yokogawa's (YOKEF) CENTUM CS3000, among others. These are well-established industrial automation systems used to control and automate a wide range of industrial processes across different industries.

One of DeltaV's main advantages is the comprehensive and versatile nature of the DeltaV system. The system offers a wide range of features and functionalities for process control, safety instrumented systems, advanced control, data management, asset management, and cybersecurity, making it a suitable solution for a wide range of industries.

Another advantage of the DeltaV system is its ability to meet industry standards and regulatory requirements, which makes it a reliable and secure choice for industrial automation. Additionally, the system's built-in cybersecurity features provide an added layer of protection against cyber threats which is increasingly important in today's digital landscape.

Emerson's dedicated customer support team and services such as consulting, engineering, and training also provide an added value for customers, helping them to optimize their industrial processes and improve performance and reliability over time.

On the other hand, one potential disadvantage of the DeltaV system is that it may be considered as a more expensive solution compared to other options in the market. Additionally, the system's complexity might make it harder to implement and maintain for some customers, particularly those with limited technical expertise. The system might also be considered as a more complex solution compared to other options in the market which could make it harder to implement and maintain for some customers, particularly those with limited technical expertise.

Ovation

Emerson's Ovation business is a leading provider of control and automation systems for the power generation industry. The Ovation system is a distributed control system ((DCS)) that is designed to control and optimize the performance of power generation facilities. It offers advanced control and optimization, real-time monitoring and data collection, and asset management capabilities. The system is suitable for a wide range of power generation facilities including coal-fired, gas-fired and renewable energy facilities.

Competition

Emerson's Ovation business competes with other providers of control and automation systems for power generation facilities such as GE's (GE) Power Generation Automation and Siemens (SIEGY) PCS7. Both are well-established players in the market with a strong customer base and offer similar products and services. They provide advanced control and optimization, real-time monitoring and data collection, and asset management capabilities for power generation facilities. Other competitors may also include companies like ABB (ABB), Honeywell, and Rockwell Automation, among others. Each of these companies have their own specific strengths and offerings, and it is important for potential customers to evaluate their specific needs and requirements to determine the best fit for their power generation facility.

One of Ovation's main advantages is the advanced control and optimization features of the Ovation system, which is designed to improve the efficiency and performance of power generation facilities. Additionally, the real-time monitoring and data collection features allow users to monitor the performance of their facilities in real-time and make adjustments as needed which is important to ensure optimal performance and reduce downtime.

Another advantage is the system's flexibility and adaptability to different types of power generation facilities, including coal-fired, gas-fired and renewable energy facilities. This allows the system to cater to the specific needs of various power generation facilities. Moreover, Emerson's services and support, such as consulting, engineering, and training, and dedicated customer support team, help customers optimize their power generation facilities and processes, and to improve their performance and reliability over time.

One potential disadvantage of the Ovation system is that it may be considered as a more expensive solution compared to other options in the market. Additionally, the system's complexity might make it harder to implement and maintain for some customers, particularly those with limited technical expertise.

Intelligent Devices

Rosemount is a leading measurement and analytical instrumentation provider for a wide range of industrial applications. The Rosemount product line includes a range of measurement and analytical instruments, such as pressure transmitters, temperature sensors, flow meters, and level sensors. The instruments measure and analyze process variables such as pressure, temperature, flow, and level. They are used in various industrial processes and applications, including oil and gas, chemical, power generation, and water and wastewater treatment.

The Rosemount instruments are known for their high accuracy, reliability, and long-term stability, which is important in industrial process measurement. The product line is also designed to meet industry standards, such as ATEX and IECEx. It complies with regulations such as SIL 2 and SIL 3, which are essential in safety-critical applications.

Fisher is a leading provider of industrial valves and control systems for various industrial applications. The Fisher product line includes a range of valves, actuators, and control systems used to control the flow of fluids and gases in industrial processes such as oil and gas, chemical, power generation, and water and wastewater treatment. The Fisher valves are designed to meet the needs of many applications, including high-pressure, high-temperature, and corrosive environments.

The Fisher valves and control systems are known for their durability, reliability, and long-term stability, which is important in industrial process control. The product line is also designed to meet industry standards, such as API, ASME, and ISO. It complies with regulations such as SIL 2 and SIL 3, which are essential in safety-critical applications.

Competitive Advantage

Emerson, now a pure-play automation company after restructuring its portfolio, is poised to benefit from its increased focus and agility. Emerson's competitive advantage lies in several areas, including being a leading automation partner for customers, being an undisputed technology leader across the technology stack, having deep domain expertise across Process, Hybrid, and Discrete end markets, and having unmatched customer relationships. These strengths position the company well to capture significant investments driven by key megatrends in digital transformation, energy security and affordability, sustainability and decarbonization, and near-shoring.

Concerns

It is unclear how Emerson's portfolio of businesses fits together cohesively. Emerson disclosed in its 2022 10-K that approximately half of the sales in the United States, its largest market, are made through a direct sales force, with the remainder primarily through independent sales representatives and distributors. Its dependence on independent sales reps and distributors raises the question of how much integration there truly is between its extensive portfolio of businesses.

Another concern is that many of Emerson's businesses do not appear to support the company's claim that it is a pure-play automation business. For example, Emerson's RIGDIG business manufactures hand and power tools and plumbing and HVAC tools.

~30% pro-forma Emerson's businesses are "growth platforms" expected to grow double-digits. However, the rest of the business is expected to grow low-single-digits. Most of these slow-growing businesses are the company's traditional process automation business serving the oil & gas industry. This mature and slow-growing business may not fit well with most people's ideas of exciting innovations in industrial automation.

Lastly, we find it awkward that Emerson only acquired a 55% controlling stake in AspenTech, which appears to be the most exciting business in its portfolio. The accounting will annoy investors as it must consolidate AspenTech's financials, remove minority shareholders' claims to earnings, and other wonky accounting requirements.

Conclusion

In our analysis, we have determined that each of the brands reviewed holds a prominent position within its respective markets. Following comprehensive restructuring of its portfolio, we believe that Emerson has become a more focused and agile organization. However, we acknowledge that a significant portion of the company's operations serve the mature and slow-growing oil and gas industry. Additionally, we believe that the company's portfolio restructuring may not be complete, as potential actions such as the acquisition of the remaining 45% stake in AspenTech or divestment of RIDGID remain possibilities. While we commend the company's management for their recent initiatives, we will be closely monitoring the progress of their growth platforms to assess the potential for accelerated growth in the future.

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