As I advance in years I find that, unlike many people, fewer things make me angry. I guess I am just coming to terms with the fact that the world doesn't always operate in the way I think it should, but seems to be doing pretty well all the same. One thing, however, that does still stir some anger and frustration is when a corporation, or more accurately its stock, is punished for poor short term results when the long term outlook is positive. Such is the case with Emerson Electric (EMR).
When, in early August, Emerson announced their earnings and revenue for the last quarter were slightly shy of expectations the stock got punished. Then, when they announced plans to divest themselves of a part of their business that had become a drag on profitability, their power transmission business, traders once again marked the stock lower. Initially lost in all of this was that orders for the company have been growing at a steady 5-6 percent month on month for a while and look like continuing to do so.
A large part of that growth has come from their Process Management Division and more specifically from that division's business servicing the oil & gas industry. The continued expansion of that business and the current retrofitting of many power generation plants around the U.S. both would indicate that EMR can not only sustain that level of growth, but quite possibly exceed it over the next few years.
In that case, a stock that is basically flat compared to a year…
As I advance in years I find that, unlike many people, fewer things make me angry. I guess I am just coming to terms with the fact that the world doesn't always operate in the way I think it should, but seems to be doing pretty well all the same. One thing, however, that does still stir some anger and frustration is when a corporation, or more accurately its stock, is punished for poor short term results when the long term outlook is positive. Such is the case with Emerson Electric (EMR).
When, in early August, Emerson announced their earnings and revenue for the last quarter were slightly shy of expectations the stock got punished. Then, when they announced plans to divest themselves of a part of their business that had become a drag on profitability, their power transmission business, traders once again marked the stock lower. Initially lost in all of this was that orders for the company have been growing at a steady 5-6 percent month on month for a while and look like continuing to do so.
A large part of that growth has come from their Process Management Division and more specifically from that division's business servicing the oil & gas industry. The continued expansion of that business and the current retrofitting of many power generation plants around the U.S. both would indicate that EMR can not only sustain that level of growth, but quite possibly exceed it over the next few years.
In that case, a stock that is basically flat compared to a year ago and has lost over 10 percent from the highs at the end of last year starts to look mighty cheap. That impression is re-enforced when you look at the basic measure of value, the P/E ratio and the assumptions underlying it. On the surface, EMR doesn't look like a screaming bargain at a forward P/E of around 16, although that does represent a discount to the broader market, but the estimates that that number is based off imply around a 4.5 percent growth rate next year. If you believe, as I do, that the oil & gas boom here in the U.S will continue and that it will accelerate in the rest of the world as hydraulic fracturing technology becomes more mainstream then any discount based on low growth assumptions starts to look like a bargain.
It should be said that Emerson is a diversified company so this is not a play for energy purists. I do, however, expect that sector to be the main driver of growth in the future. Management at the company certainly believes in the prospects as they have been restructuring to prepare for growth and have announced plans for increased capital expenditure next year. That the stock has languished as a result may make my blood boil, but it certainly presents an opportunity for investors capable of looking past the next earnings report.
Even for a long term play such as this, though, basic investing discipline demands that we look for a level at which to cut should circumstances change, at least while we rethink the idea. If we extend that 1 year chart back by a couple of months it can be seen that the $60 level provides such an opportunity.
To be honest, a stop loss level less than 10 percent away is a little close for a long term play in what has been a fairly volatile stock lately, so I would be inclined to leave a little leeway and place the stop at around $56.
As the short term fall in EMR represents an opportunity, maybe that too can be seen as a positive rather than a frustration and I should keep my anger in check. I suppose that in the immediacy of the modern age the tendency of markets to focus on short term news shouldn't surprise or anger me, but it does call into question the ability of those markets to fulfill their most basic functions, to efficiently allocate capital and to act as a forward discounting mechanism. On reflection, I think I will stay angry at this one, even as I recognize the opportunity it presents.
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