Emerson Electric (EMR) manufactures various industrial products and provides engineering services to companies operating in industrial, commercial, and residential markets in North America and internationally. The company’s headquarters are in Saint Louis, Missouri.
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Recent Share Price Performance and Possible Developments
After a decline of more than 20% in the industrial sector, Emerson Electric shareholders have seen their shares fall by more than 11% since the start of the year.
I believe this trend is not over, and I am bearish on the stock for now. However, I would continue to hold shares in Emerson Electric Company because, despite the market situation, it remains a quality stock, in my opinion.
Thanks to a solid balance sheet and a strong core business generator of cash flow, this company is a loyal dividend payer.
Meanwhile, the decline in Emerson Electric’s stock price could intensify in the coming weeks, driven by the same factors that have fueled negative market sentiment so far. Thus, for the long-term investor, it will be easier to Buy additional shares of Emerson Electric Company and achieve a higher dividend yield (not only because of a lower share price).
In fact, the company’s expectations for improved adjusted earnings per share increase the likelihood of a dividend hike.
Bearish Sentiment Triggers
Currently, it is very likely the bearish trend will continue. The triggers such as the war in Ukraine, high inflationary pressures, and risky monetary policies to preserve the U.S. dollar’s purchasing power are strong and likely to pose long-term issues.
Rate hikes, which are being used to ensure currency stability, could trigger a U.S. recession if too steep, Federal Reserve Chairman Jerome Powell conceded in a hearing before the Senate Banking Committee on Wednesday.
A recession, which is now very likely, would reinforce the chance of EMR stock falling, as demand for industrial products and engineering services will also be under pressure.
Emerson’s Growth Outlook by Geographic Area
Sure, it will affect the share price of industrial stocks, but Emerson Electric will be one of the few companies in the industry where the impact of the recession shouldn’t hurt earnings and, by extension, chances of a dividend increase.
The geographic diversification of Emerson Electric’s portfolio as its operations take place in America, Europe, and internationally will be of great benefit to the company in the coming months when difficult conditions are expected in many markets.
Europe Segment
The energy crisis caused by the war in Ukraine will create severe headwinds for Emerson Electric Company’s European markets. That’s because widespread reliance on non-domestically produced fossil fuels exposes Emerson Electric’s customers’ balance sheets to speculation in the spot oil and gas markets.
Given the extraordinary magnitude of the energy problem, many customers’ hedging strategies may not be sufficient, which will almost certainly mean that Emerson Electric’s revenue growth will be slower than usual in Europe.
The company already noticed this negative trend in the second quarter of 2022, when the revenue growth rate in Europe, which was 2%, fell 500 basis points (bps) from the growth rate of 7% recorded for the second quarter of 2021.
However, what is likely to be less challenging in North America than feared, coupled with a strong recovery in Asian markets, should fully offset European headwinds.
U.S. Segment
Energy is also an important issue for Emerson Electric’s U.S. customers, as they operate in industries that use it massively. Due to the global impact of financial markets, Emerson Electric’s U.S. customers are also facing the problem of higher energy costs.
The U.S. government will try to ease the burden on corporate balance sheets. U.S. President Joe Biden even wants to talk to major domestic energy companies about cutting energy costs.
Should this initiative bear fruit, it will also benefit Emerson Electric sales in the U.S. and strengthen armor against a likely economic downturn.
China Segment
The Chinese market, which continues to drive Emerson Electric’s international sales, with a growth rate of 11% in the second quarter of 2022, will benefit from the following developments.
First development: China’s purchase of Russian oil at a heavily discounted price will have a positive long-term impact on the Chinese demand for Emerson Electric’s technology and services.
The sharp increase in oil supplies to the world’s second-largest economy will allow Russia to dethrone Saudi Arabia from the position of China’s top oil supplier.
As a result, Chinese markets will benefit greatly from Moscow’s strategy of finding a way to circumvent sanctions imposed by the U.S. and its allies over the Russia/Ukraine war.
Second development: economic growth coupled with an improvement in China’s business environment, as indicated in the Bank of China (BOC) report from last March, is another positive sign.
A more favorable trading climate will encourage Chinese banks to adopt a selective medium/long-term credit policy in favor of key sectors that generate a significant portion of the demand for Emerson Electric’s products and services.
Earnings Guidance
As a result of the above, Emerson Electric should see an earnings improvement in the next few months.
The company’s forecast of full-year 2022 adjusted earnings, which points to a growth of 20.7%-24.4% from $4.1 in 2021 to $4.95-$5.10 in 2022, is reasonable, leading to positive thinking about additional dividend hikes.
On June 10, the company paid a quarterly dividend of $0.515 per common share, yielding close to 2.7% as of this writing.
Dividend Hike Sustainability
Thanks to a strong balance sheet, the company has been able to push through several dividend increases in recent years.
As of March 30, the balance sheet showed total cash of $6.93 billion and total debt of $11.5 billion, for a ratio of 0.60. Also, its interest coverage ratio of 18.7. If the interest coverage ratio is above 1.5, it means the company can afford all the outstanding debt.
In terms of full-year 2022 free cash flow, Emerson Electric has confirmed the same level as last year, which was $3 billion.
Therefore, the financial conditions appear solid enough to increase the dividend payment again.
Wall Street’s Take
In the past three months, 10 Wall Street analysts have issued a 12-month price target for EMR. The stock has a Moderate Buy consensus rating based on five Buys, five Holds, and zero Sell ratings.
The average Emerson Electric Company price target is $103.11, implying 25.8% upside potential.
Valuation
Shares are changing hands at $82.07 as of the writing of this article for a market cap of $48.8 billion, a price/earnings ratio of 17, and a price/sales ratio of 2.6.
The stock is currently trading near the lowest limit of the 52-week range of $76.77 to $105.99. This price is also much more attractive compared to the 50-day moving average price of $87.30 and the 200-day moving average price of $92.86.
These comparisons show that the stock has been significantly cheaper for about a year. However, this is not enough to support a buying decision, as Emerson could decline further in the coming weeks based on current market conditions and their likely future trajectory.
Conclusion
Market headwinds will likely continue to impact Emerson Electric’s share price.
Lower market valuations offer an opportunity to increase one’s position in this company, which has excellent growth prospects despite numerous geopolitical and macroeconomic issues.
The company should be able to increase its dividend in the future.
