Emerson Electric (EMR) - Buy at $26.40

Current Share Price approx. $35

Cash Per Share = $2
Foreward Dividend = $1.32
Payout Ratio (ttm) = 46%
Payout Ratio (4*mrq) = 67%

Market Cap = $25 B
Debt = $5 B
Enterprise Value = $30 B

Revenues (ttm) = $23 B
Operating Margin (year ago ) = 14%
Operating Margin (mrq) = 11%

Operating Cash Flow (ttm) = $3 Billion
Operating Cash Flow (mrq) = $500 Million

Enterprise Value/EBITDA = 6.7x
Current Ratio = 1.3x

Background:

Emerson reports its latest quarterly (3Q) numbers in 2 weeks. Enterprising owners can anticipate share movement as the 3Q numbers leak out. Owners may have the opportunity to buy Emerson at favorable prices depending on how Mr. Market judges the rumours about 3Q.

Emerson is one of those high performing corporations which has moved into relative obscurity since the Nifty-Fifty days. Emerson is able to generate above average margins year after year - through first rate manufacturing processes continually improved.

Proof of Emerson's superior manufacturing ability is in its 11% operating margins. Emerson generates these margins in near commodity type businesses - small eletric motors, low voltage drives, couplings, and garbage disposals.

Emerson's 2Q numbers indicated management has been pro-active in adjusting to the new economic reality. Management forcefully cut back capacity expansions and squeezed working capital. Trade Working Capital turns of 5x revenues are still higher than Gudovac would prefer. The high Trade W/C may be due to Emerson's Engineering culture rather than a bean counting financial culture. However, Emerson's management appears to be moving forward on addressing excess working capital.

Emerson's revenues will contiue to drop. Owners will need to examine Emerson's fixed versus variable costs as annual revenues drop below $20 billion. Owners also need to examine Emerson's dependence on North American markets.

Gudovac expects Emerson to produce quarterly Free Cash Flow in the range of $350 - $400 million during the next few quarters of the business cycle. This is less than one-half of Emerson's FCF during its good years. Low debt levels will allow owners to retain a dividend rate of $1.32 through the economic cycle.

A prudently managed, steady state Enterprise should generate a modest dividend for its owners. A 5% dividend translates into a share price of $26.40. 5% dividend provides owners with a modest return.

Don't get Massacred !

Gudovac1941@gmail.com