Revenues and earnings were expected to keep advancing in the beginning of the new fiscal year. This indicates that ongoing revenues and earnings are not being held back by the current slow growth environment. Companies were expected to generate average Earnings Per Share (EPS) growth at a rate of 11.2% in fiscal 2013. This, if it occurs, reflects outsize earnings growth from the previous meager growth rates.
It is still possible that this projection could be revised down–that happened last year. Nevertheless, on the whole, the EPS of these companies will most likely improve. Factors pushing EPS in that direction include aggressive share repurchase programs, growth from acquisitions, and cost savings from restructuring.
In this article, I focus on Emerson Electric Co. (NYSE:EMR), a stock that should be considered for its potential to return significant profits.
Business Model
Emerson Electric Co. (NYSE:EMR) is a diversified industrial stock that designs and supplies products and technology and delivers engineering services. The company has four main business segments: Industrial Automation, Network Power, Climate Technologies and Commercial & Residential Solutions.
Due to recent volatile economic conditions, Emerson Electric Co. (NYSE:EMR) is not making any massive capital expenditures at present. At the end of Q1, its capital expenditure stood at only $115 million. At the same time, the company is investing only in key strategic programs to make sure that it will be well-positioned when global economic growth picks up the pace.
Dividend Profile
Emerson Electric Co. (NYSE:EMR) has a long history of dividend payments. At present, Emerson offers a quarterly dividend of $0.41 cents per share. For the full year of 2012, it paid a dividend of $1.60 per share, which is up from $1.435 per share in 2011. As shown in the below table, Emerson has been consistently increasing its dividends. In the past five years, it has raised its dividend by 36.67%.
| Year | Dividend |
|---|---|
| 2012 | $1.61 |
| 2011 | $1.435 |
| 2010 | $1.35 |
| 2009 | $1.325 |
| 2008 | $1.23 |
Morningstar.com
Financial Analysis
All of its four business segments are generating solid returns. At the end of Q1, it had been able to expand its revenue by 5% to $5.6 billion. On average, in the past three years, it has enlarged revenues by 6.7% while the industry average stood at a negative 0.4%. Additionally, it has shown solid margins while converting sales into earnings. As an indication of its solid margins, at the end of Q4, its Earnings Before Interest and Taxes [EBIT] margin stood at 13.1% and improved by 160 basis points.
After a modest year, the company has shown exceptional growth in its cash flows. At the end of Q1, its operating cash flow stood at $554 million, representing an increase of 66% over the past year. Its operating cash flows were expanded mainly due to high earning and lower working capital growth.
Furthermore, Emerson Electric Co. (NYSE:EMR) has hefty cash flows that adequately cover its dividend payments. Its free cash flows enlarged by 115% in the last quarter alone. At the end of the first quarter, its free cash flow stood at $439 million while its dividend payments accounted for $297 million. Its dividends are safe with hefty free cash flows. As an indication of strong cash flows, the company is also working share repurchase program. At the moment, Emerson Electric Co. (NYSE:EMR)’ financial situation is stable.
Competition
Emerson Electric Co. (NYSE:EMR)’s main industry peers are 3M Co (NYSE:MMM) and General Electric Company (NYSE:GE). At present, General Electric and 3M Co (NYSE:MMM) are focusing on enhancing their margins, and both companies are strongly working on restructuring program. For now, GE is not making massive investments. The company is only focusing on strategic priorities. General Electric Company (NYSE:GE) has a high debt to equity ratio of 1.9, while the industry average stands at 1.1. In the past three years, on average, its revenue growth was a negative 1.9%.
On the other hand, 3M Co (NYSE:MMM)’s has high revenue and earnings growth rates, while its D/E ratio is low at 0.3. 3M has one of best cash conversion rates in the business at around 90-100 percent. 3M is a solid stock with strong financial position. Amidst all this, the stock looks overvalued at present.
Summary
Over the year, Emerson’s stock has shown enjoyed exceptional surge with few shortfalls. At present, year to date, Emerson is trading nearly at its lowest point, which presents an opportunity to initiate a position in the company. Emerson is trading at a discount, with analysts estimating a mean target price of $61.27.
Emerson Electric Co. (NYSE:EMR) has a diversified revenue base and the potential to generate strong cash flows. Additionally, it is anticipating increasing its underlying sales by 2% to 5% in 2013, and achieving an EBIT margin expansion of 10 to 20 basis points. I think Emerson can be a safe pick for long term investors with its solid dividends and steady price appreciation.
The article Emerson Electric Is a Solid Pick Among Diversified Industrial Stocks originally appeared on Fool.com and is written by siraj sarwar.
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