Emerson Electric is an American electrical equipment manufacturer founded in 1890 year with approximately 132 000 employees and 230 manufacturing locations worldwide.
Company operates in five major segments:
- Process Management, $8.6b sales, 36k employees
- Industrial Automation, $4.9b sales, 25k employees
- Network Power, $6.2b sales, 45k employees
- Climate Technologies, $3.9b sales, 16k employees
- Commercial & Residential Solutions, $1.9b sales, 7k employees
Geographical split of sales: US & Canada 44%, Asia 24%, Europe 20%, Latin America 6%, Middle East & Africa 6%.
In 2015 company decided to spin off Network Power through a tax-free distribution to shareholders. Main aim is to make company lighter, faster growing and more profitable. I do not understand why shareholders do not like this idea so much – ok, maybe getting some piece of separate business is not so good for long term dividend investors, but on the other hand share price dropped so much that valuation without Network Power segment would be acceptable.
Share price decline was also caused by macro issues. Key points:
- Lower demand from Oil & Gas producers
- Weak demand from industry in general
- Strength of US Dollar (only 44% of sales is generated in US & Canada)
- Weak demand from EM
Is it really so bad with industry all around the world?
It is hard to believe for me, but official outlook is rather poor…
As it comes to financials (estimates):
Market cap ~ $28B
Net debt ~$3B
Payout ratio ~60%
Beta = 1.2
Dividend yield 4.4% + buyback, new program 70m shares (>10% shares outstanding)
Estimated valuation ratios:
EV/EBITDA = 8.1
P/E = 15
EMR is one of The Dividend Kings with history of increasing payments since 1957 year. Current dividend yield is high from historical perspective – around 4.5%. This is because share price dropped a lot – investors do not like spin off. For me it might be an opportunity to buy, but I am not sure whether “new” company will keep tradition of raising dividends.
Drawdown risk analysis:
Drawdown is currently around 35% – quite a lot. This is due to several issues – lower operating results (see above), but to my mind it is mainly due to spin off, which is not preferable by investors. From the day of spin off announcement shares are down by around 25%, which is $10b market cap. It is far more than the value of Network Power division not to mention that shareholders will not lose Network Power for free. I see $44 as an special opportunity and I think I will buy shares soon, although case is quite risky.
Summing up, Emerson Electric is not a rocket science business but valuation is acceptable, dividend yield attractive, debt is not so high and I believe that management do not want to decrease shareholder’s value by spin off. I think I will buy some shares soon. $44 is acceptable level for me.
Disclaimer EMR – no position (yet)