NATI - Emerson Electric: 'Winner' For National Instruments

2023-04-13 11:31:03 ET

Summary

• Emerson Electric Co. has managed to reach a deal to acquire National Instruments.
• The question is if Emerson is the winner in this deal.
• With many moving parts in its transition, Emerson remains a bit cloudy.
• I like the long-term potential but still see no reason to get involved here just yet.

In mid-February, I concluded that it were interesting times for shares of Emerson Electric Co. ( EMR ) as there were many moving parts in the portfolio of the business, perhaps a few too many. The latest at the time was the involvement in a hostile attempt to acquire National Instruments Corporation ( NATI ) , creating additional uncertainty. Given this position, I was hoping to see a further pullback before getting involved.

A Quick Recap

Emerson Electric continues to pursue a continued transformation strategy, steering activities to higher growth and higher margin businesses in order to create a more diversified and better-positioned business. This is in theory to be applauded, if these transactions are done at reasonable prices, yet the pace of the transition was a bit too elevated for me.

Emerson Electric was an $18 billion diversified industrial play in 2021, reporting sales across an $11.6 billion automation solution segment and a $6.7 billion commercial & residential solutions business, both posting segment margins around 20% of sales. With earnings posted around $4.50 per share and net debt of $4.3 billion equal to EBITDA, the resulting 20 times earnings multiple at $90 per share looked reasonable.

What followed were some (complicated) deals which started with the acquisition of a majority stake in AspenTech late in 2021. This deal was particularly complicated, as Emerson paid $6 billion to obtain a majority share stake in the business, while contributing some physical assets to it as well.

What followed was a $3 billion deal to divest its InSinkErator business to Whirlpool Corporation (WHR) in the summer of last year, as the company announced the sale of a majority stake in the climate technologies business (part of the commercial and residential business) to Blackstone at a $14 billion valuation. These activities generate $5 billion in sales and the company would see $9.5 billion in pre-tax proceeds, while maintaining a 45% stake in the business.

These deals were quite complicated, as the company posted fiscal 2022 results at the same time, with sales up 8% to $19.6 billion with adjusted earnings up 16% to $5.25 per share. However, pro forma for the divestment to Whirlpool and Blackstone, continuing operations generated just $13.8 billion in sales and earnings of $3.64 per share. The company called for 2023 sales set to rise by 7-8%, with earnings seen around $4.00-$4.15 per share, as earnings per share growth is (partially) anticipated on the back of a $2 billion buyback program.

Trading at $96 at the time of the Blackstone deal last year, I was cautious as shares fell to $82 by mid-February. This came as the company announced a hostile offer to acquire National Instruments Corporation in a $7.6 billion deal, at $53 per share, wiping out the pro forma net cash position following the Whirlpool and Blackstone deals.

With a $1.7 billion sales contribution, National Instruments does not come cheap at 4.5 times sales as the business appears to be less efficient in terms of productivity, making this more or less a turnaround story. After the company posted a solid 7% increase in first quarter sales, and adjusted earnings around $0.78 per share, the situation was complicated as the hostile deal was not helping to solve this. Despite the uncertainty, I liked the long-term potential of the business, as I was willing to enter at $75 per share, that was my stance in February.

Holding Steady

Since the past one and a half month, shares of Emerson Electric Co. have been trading range bound in the lower eighties. The big news item arrived in April as the company has reached a deal with National Instruments to acquire the company in a deal valued at $60 per share, for an equity valuation of $8.2 billion. As Emerson already held 2% of the shares which it acquired at $36 and change, the effective purchase price falls to $59 and change.

Following the higher price tag, the deal does not come cheap at 15 times EBITDA, but this is already after factoring in the estimated synergies, which furthermore will take a long time to be realized.

In the meantime, Emerson has provided more color on its intentions, as the company sees $165 million in costs synergies, a big number which is equal to about 10% of reported sales, although it will take a full five years to be realized and will come at upfront costs being roughly equal to the synergy target.

Amidst the many moving parts, Emerson aims to finance this deal with the Blackstone transaction, with leverage seen below 2 times upon closure. The company has furthermore indicated that the deal is accretive to the growth profile, and that the deal will be accretive to adjusted earnings per share in year one, without quantifying this accretion.

Too Uncertain

Since February, not much has changed, other than that Emerson has raised its offer for National Instruments, of course. With Emerson Electric Co. shares trading flattish, I am a bit cautious here as the valuation looks full here, and there are many moving parts to the investment thesis.

Given all this, I am just not willing to commit to Emerson Electric Co., with uncertainty high as valuation has come down a bit. The resulting 20 times earnings multiple and pro forma leverage of 2 times looks quite full and fair.

I am cautiously optimistic on the strategic route of the Emerson Electric Co. business, yet want to see it all pan out in terms of the pro forma numbers here, so with so many deals having taken place as of recent.

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