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Emerson Electric (EMR): Even The Opportunity For A Profit Makes Me Mad

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…




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