Most industrial companies are embracing advanced automation solutions that drive efficiency and reduce production cycle times. On a global scale, many governments support this transition, and that support has translated into financial and regulatory backing.
The global industrial control and automation market is projected to reach $218.8 billion by 2027, which comes out to a CAGR of 8.2%. That figure has piqued investor interest, and some have determined that adding related shares to otherwise diversified portfolios is likely to generate strong returns.
One industrial firm that has attracted investor interest is Emerson Electric Co. (NYSE:EMR). Emerson is pivoting away from its conventional business to become a leader in automation, which appeals to those with medium to long-term investment horizons. Is their assessment correct? Is Emerson Electric stock a smart buy?
Emerson Electric’s Change Over the Years
Emerson Electric is an engineering and industrial automation titan, and has grown massively since its early days when it was founded in the late 1800s as a manufacturer of electric motors and fans.
Not happy to rest on its laurels, management is looking to shift the focus of the business. And that began by selling a majority stake in its Climate Technologies business, and it divested its InSinkErator and Therm-O-Disc business units.
The company has combined its industrial software businesses, OSI Inc., and its Geological Simulation Software business with AspenTech to create a global industrial software organization. When the deal closed, Emerson owned a 55% stake in the newly formed company, Aspen Technology, Inc. (NASDAQ:AZPN). These moves were in line with Emerson’s goal to transition from its roots as a major manufacturer to a leader in the automation space.
Most industry analysts saw these moves coming because Emerson had foreshadowed them for nearly a decade. In 2015, Emerson announced two core business platforms would be at the helm of its new ambitions to create shareholder value, namely Automation Solutions and Commercial & Residential Solutions.
Last year, Emerson went full bore on its automation ambitions via the acquisition of software-connected automated test and measurement systems provider NI. The purchase price for NI was $8.2 billion.
The addition of automation skills and expertise has allowed Emerson to evolve into a global automation powerhouse, and for now, it seems the period of acquisitions is over. At the start of fiscal 2024, business leaders indicated that the majority of Emerson’s strategic portfolio transformation was complete.
Emerson Electric’s Financial Performance
The company’s top line did experience a pullback in 2021 with sales sliding by over 20% year-over-year in each and every quarter but in subsequent years, the company steadily regained the lost ground.
By fiscal 2022, Emerson’s figures were back on track with net sales for that year totaling $13.8 billion. As of fiscal 2023, Emerson’s top line stood at $15.17 billion, showing a year-over-year growth of 9.9%.
Gross profit as a percent of sales has been pretty steady around the 52% mark of late and that’s up substantially from around 44% in early 2022.
Adjusted segment EBITA as a percentage of sales has been on an upward trajectory since fiscal 2020 too, and further highlights how management’s goals are really taking effect.
Although underlying orders declined slightly in the second quarter of fiscal 2024, which ended in March, Emerson’s underlying sales posted an 8% year-over-year gain. Reported sales increased by 17% from the prior year period for a total of $4.38 billion.
Adjusted segment EBITA margin grew by 140 basis points to 26%. Operating and free cash flow both posted strong 32% gains compared to their year-ago values.
Emerson Electric Pays a Stable Dividend
Emerson started paying dividends in 1956, and since then, the annual dividend rate has increased each and every year. That gives the company a whopping 67-year history of dividend growth.
The consistency makes Emerson part of the exclusive Dividend Kings list, which is composed of the 53 companies that have raised dividends for 50 or more consecutive years.
Emerson last declared a quarterly dividend in May of $0.525 per share, which was payable to shareholders in June. This translates into an annual dividend rate of $2.10 per share and a yield of 1.94%.
Emerson’s dividend is generally regarded as quite safe thanks to a sustainable payout ratio of 40.50%.
Overall, the company has delivered approximately $500 million in returns for shareholders through a combination of stock repurchases and roughly $1.2 billion of dividend payments this year.
Is Emerson Electric Stock A Buy or Sell?
Emerson Electric has 19.2% upside according to the consensus price target of 24 analysts who forecast $126.75 per share.
Emerson has set its sights on a market segment that is expected to grow exponentially in the coming years. The integration of automation into industrial processes is quickly becoming the industry standard, and companies capable of supplying effective, affordable solutions are very likely to benefit. Those factors alone would make Emerson stock a buy.
Emerson’s price is sitting at 36.2x earnings, which is high compared to the industry average and that’s confirmed by the PEG of over 1.0. That’s not a bargain when compared to the industry average but Wall Street analysts see an 11.9% upside in the stock, and a majority have rated Emerson stock a buy.
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