Emerson Electric Co. (EMR, Financial) has had an excellent 12 months as shares are up 98%. Part of this was that the Covid-19 pandemic severely impacted demand for the company's products. Recently, results have shown some improvement and the market has responded with a near double in the share price. The S&P 500 is up 61% over this same period of time, so Emerson has easily outpaced the broad market.
Is there more room for Emerson's stock to go higher or should investors consider trimming their positions? We will look at the company's most recent earnings results along with its valuation and dividend history to determine the answer to that question.
Recent earnings result
Emerson reported results for the first quarter of fiscal 2021 on Feb. 2. Revenue inched up 0.2% to $4.16 billion, which was $188 million higher than expected by Wall Street analysts. Revenue growth may not seem all that impressive, but this was Emerson's best quarter for year-over-year growth since the fourth quarter of 2019.
Adjusted earnings per share, which excludes restructuring charges, improved 16 cents, or 24%, to 83 cents. This was 15 cents above estimates. While share repurchases added 2 cents to this growth, improvement in operations contributed 12 cents, the bulk of the increase.
Breaking results down by region, sales in the Americas fell 7%. Offsetting this was a 4% improvement in Europe and a 3% increase in Asia, the Middle East and Africa.
By segment, Emerson's Automation Solutions business had a sales decline of 6% to $2.7 billion. This segment represented about 65% of total sales. Much of this weakness was due to a 20% decline in the Americas region. Leadership stated that it saw much lower demand from its customer base in this region. A few positive areas were life sciences, medical, food and beverage and power, all of which had very strong demand. The other two regions both grew 2%, with China providing 6% growth. Currency exchange was a 2% tailwind to results.
Orders for Automation Solutions in the October to December period were down 13%. Orders were down 15% in October, before improving to down 10% in November. This figure was maintained in December as well, offering some evidence that the decrease in orders might be stabilizing. This segment's backlog improved approximately $600 million to $5.3 billion.
Emerson's Commercial and Residential Solutions segment grew 13% to $1.5 billion, led by 14% growth in the Americas. This region had strength in home products and residential HVAC. Europe improved 8% due to higher demand for heat pumps and efficient appliances. A 10% increase in China led to 7% growth in the AMEA region.
Three-month orders grew 15%, primarily due to the global residential and cold chain markets. Order growth actually accelerated each month of the quarter. This segment's backlog increased $200 million to almost $800 million.
The company's gross profit margins did decline 100 basis points to 41.4% due to volume and mix. A positive note, selling, general and administrative expenses as a percentage of sales were down 310 basis points to 24% due to cost controls.
Emerson ended the quarter with $23.7 billion in assets on its balance sheet, including $7.7 billion of current assets and $2.2 billion of cash and cash equivalents. This compares to total liabilities of $16 billion and current liabilities of $6.4 billion. Total debt stood at $8.2 billion, with current debt at $1.9 billion.
The company also provided updated guidance for fiscal 2021. Emerson now expects revenue growth of 4% to 8%, up from 1% to 4% previously. Both segments are expected to show higher growth than before. Automation Solutions is expected to be a in range of down 3% to up 1% compared to down 4% to down 1%. Commercial and Residential Solutions is projected to produce 8% to 10% growth, up from 4% to 7% growth. Adjusted earnings per share are expected in a range of $3.60 to $3.80, compared to $3.40 to $3.50. At the midpoint, this would be a 7% increase from fiscal 2020.
Dividend and valuation analysis
There are just a handful of companies with the minimum requirement of 50 consecutive years of dividend growth to qualify as a Dividend King. Emerson is one such name as it has one of the longest dividend growth streaks in the marketplace at 64 years.
The dividend has a compound annual growth rate of less than 4% over the last decade. Shares offer a yield 2.2% as of Thursday's close of trading, which is almost a full percentage point below the 10-year average yield of 3.1%.
This low yield isn't terribly surprising, given that the stock is up almost 100% over the last year, but Emerson definitely isn't providing as much in the way of income as it historically has. According to Value Line, if the stock were to average the current yield for an entire year, it would be the lowest yield since at least 2004.
Besides the lengthy dividend growth streak, Emerson has very reasonable payout ratios.
With an annualized dividend of $2.02 and using the midpoint of earnings per share guidance, Emerson has a projected payout ratio of 55%. This is at the low end of the 10-year payout range and below the average payout ratio of 59% since 2011.
The free cash flow payout ratio looks even better. The company has distributed $1.2 billion of dividends over the last four quarters while generating free cash flow of $2.9 billion for a free cash flow payout ratio of 41%. This compares to the average payout ratio of 55% dating back to fiscal 2018.
What doesn't look so appealing is Emerson's valuation. The stock closed at $90.41 on Thursday and has a forward price-earnings ratio of 24.4 using company guidance. This is a significant premium to the 10-year average price-earnings ratio of 19.1.
Emerson also looks expensive using GuruFocus's estimate of intrinsic value, or GF Value.
Emerson has a GF Value of $70.12. Using the current share price, the stock has a price-to-GF Value of 1.29, which earns it a rating of modestly overvalued from GuruFocus. Shares would have to retreat more than 22% to trade with its GF Value. As shown in the chart above, Emerson's is almost at its highest level relative to its GF Value since at least 2017.
Final thoughts
Emerson has been impacted greatly by the Covid-19 pandemic. Automation Solutions is still seeing double-digit order declines, due in large part to the ongoing pandemic. Demand has improved slightly and may even be stabilizing. On the other hand, Commercial and Residential Solutions continues to perform quite well in all regions. The company expects fairly strong revenue and adjusted earnings per share growth in 2021.
As a dividend growth investor, Emerson's dividend growth streak is very impressive, especially since it operates in a cyclical sector. However, dividend growth has slowed and the current yield is well off of its long-term average.
Overall, Emerson appears to be a well-run business that is very shareholder-friendly. The company will likely see higher demand in its largest business as the world recovers from Covid-19. Unfortunately, the market knows this, which is why shares are up so much over the last year. With a premium multiple and high price-to-GF Value, I would wait for a pullback in the stock before adding Emerson to my portfolio.
Disclosure: The author has no positions in any stocks mentioned in this article.
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