What’s Up with Emerson Electric?

I caution investors to try to avoid buying a stock with a P/E Ratio of 10 and hoping it doubles to 20. A better strategy is to look for a stock where the E — the earnings — can triple in a decade.

I think value investors too often overemphasize the value portion of the equation at the expense of growth. The value side can really be summed as “don’t do anything crazy.” Outside that, I don’t worry too much about value. And I never try to short based on value.

Lately, I’ve been looking at the stock of Emerson Electric (EMR). Emerson has long been one of those stalwart blue chip stocks. They’ve raised their dividend every year since the Eisenhower administration.

But the shares have come under hard times recently. EMR dropped from a high of $62.75 in May to a low of $47.83 last week. It’s currently just below $50 per share. As a domestic manufacturer, the strong dollar has hit Emerson hard. The last earnings report was a complete dud:

Given that little change is expected in market conditions for the remainder of the year, Emerson again slashed guidance. The company now projects $3.97 to $4.07 in per-share earnings for the business year ending in September, down from its last estimate of $4.17 to $4.32 a share. That range includes a gain of 77 cents a share stemming from its power-transmissions divestiture.

The company, which had said it would accelerate restructuring plans, said full-year restructuring is now expected to be between $160 million and $180 million.

In all for the June quarter, Emerson earned $564 million, or 84 cents a share, down from $728 million, or $1.03 a share, a year earlier.

Revenue slid 13% to $5.5 billion. Stripping out currency effects and the impacts of divestitures, sales fell 5%, the company said.

Ouch!

But there’s an upside (you were probably wondering). Emerson is planning some big changes. In June, they said they’ll spinoff their network-power business. The company’s previous strategy was to go into network power in a big way. To put it lightly, that was a flop. Fortunately, the company is trying to undo the problem. Emerson is also considering selling off part of their industrial-automation group.

I like these moves, and I’m impressed when a good company recognizes the bad moves they’ve made. The slimmed-down Emerson could be a very good buy. It’s too early to say just yet, but EMR is a stock to watch.

Posted by Eddy Elfenbein on August 17th, 2015 at 11:27 am

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