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Emerson’s (EMR) Outlook Robust on Recent Acquisition Spree


Emerson Electric Co. EMR recently wrapped up the purchase of Cooper-Atkins, boosting its inorganic growth further. Cooper-Atkins will strongly complement Emerson’s global cold chain business, which includes the Cargo Solutions business and the ProAct Services portfolio for supermarkets.

Acquisition Spree

Emerson has been on an acquisition spree, of late. A month back, Emerson acquired Paradigm — a dominant provider of software solutions to the oil and gas industry — for $510 million. Paradigm will serve to deepen Emerson’s foothold in the upstream oil and gas market, as the former adds a series of subsurface software tools to the latter’s growing Automation Solutions portfolio.

Last October, Emerson bought GeoFields, Inc., a global supplier of software and implementation services for the oil and gas industry, to strengthen its foothold in pipeline solutions for the oil and gas industry.We believe these buyouts will help the company create a solid core business model and drive profitable growth in the near term.

The company’s actions have, it seems, met with shareholder approval. Emerson has outperformed the industry over the past six months, having appreciated an impressive 20.9% compared to the industry’s gain of 9.4%.

Core Restructuring Actions

Emerson has been executing restructuring activities since 2015 to drive efficiency and growth. In fact, Emerson has slashed almost a third of the company’s sales during its two-year restructuring process.

As part of its strategic portfolio restructuring, Emerson agreed to divest its ClosetMaid business to Griffon Corporation, back in September last year. In fiscal 2016, the company sold three of its businesses — Network Power, Leroy-Somer and Control Techniques — and generated $5.2 billion in proceeds. These restructuring actions will enable Emerson to capitalize on its growth platforms.

To maintain its scale of operations, the company has been making smaller, bolt-on acquisitions. Importantly, Emerson completed a $3.15-billion acquisition of Pentair’s valves and controls business in April. Integrating Pentair’s Valves & Controls business will enable Emerson to fortify its automation portfolio and help it offer complete valve solutions portfolio and sturdy service network, thereby elevating the company’s brand value. Emerson expects the acquisition to be earnings accretive in fiscal 2018 and contribute meaningfully to operating cash flow.

Emerson maintains that it is on a constant lookout for small bolt-on and strategic acquisitions to bolster its sales to up to $20 billion and cash flow back to more than $3.2 billion over a span of next five years. To that end, Emerson intends to spend between $500 million and $1.5 billion on bolt-on acquisitions over the next couple of years. Last year’s outlay for the same came to about $1.5 million.

Growth Drivers & Business Scenario

Solid order trends, successful multi-year restructuring initiatives, and momentum in both its platforms will likely prove accretive for the company’s sales. Emerson’s process automation business has finally got over its recession, with orders being strong and organic revenues growing. After the sale of a major chunk of this segment to Nidec Corporation, Emerson now generates more than 60% of its revenues from this segment. Improving industry trends bode well for this segment’s growth in the quarters to come.

The company has been enjoying broad-based growth, driven by favorable trends in the energy-related, hybrid and general industrial markets, as well as sturdy demand in the HVAC and refrigeration markets. Emerson anticipates increasingly favorable global market conditions and encouraging trends in capital spending, which will likely drive underlying sales growth across both platforms in the coming quarters.

The ongoing recovery in oil and gas is likely to be the most significant profit driver for Emerson. In fact, it derives 50% of its total sales from the energy sector. With the addition of the Valves & Controls business, roughly 70% of sales in Automation Solutions will be generated directly from oil and gas customers. Emerson projects strong growth for this division, and as oil prices recover, the high level of exposure to energy end markets will likely boost the company’s earnings. However, should oil prices reverse course, there is a substantial risk that large energy projects could be delayed or canceled, which would have a material impact on the company’s operations.

Also, a strong U.S. dollar, volatile industrial spending, and uncertainties in emerging and mature economies remain concerns for this Zacks Rank #3 (Hold) company.

Stocks to Consider

Better-ranked stocks in the broader space include ABB Ltd. ABB, H&E Equipment Services, Inc. HEES and Caterpillar, Inc. CAT, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ABB has generated an average positive surprise of 11.7% over the trailing four quarters, beating estimates all through.

H&E Equipment Services has generated three strong earnings beats in the trailing four quarters, for an average surprise of 34.7%.

Caterpillar has a striking earnings surprise history for the same time frame, having beaten estimates all through for an average beat of 53.1%.

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