Gudovac suggested that Emerson might be a reasonable Enterprise to own back on 20.August, given its modest risk profile. Owning EMR at these prices levels is purely a function of each Owner's discount rate. Some owners may not believes Emerson's expected return warrants purchase. Others may differ. Gudovac suggested that Emerson would provide a CAGR return of 6 5/8% bought at the prices of 20.August. Gudovac believes the 6 5/8% return rate is still acceptable return for Emerson's risk profile.
The decline in orders at Emerson is spread throughout their product lines as shown by the chart copied from the 8-k filing. (all numbers in percentage change y.o.y.) The scope of decline implies that the decline is deep and will be persistent.
Owners should be clear about the long term profit implications of backlogs which are 20 - 25% lower than the boom period levels. Management at any first rate Enterprise such as Emerson will proactively reduce variable costs in line with the decline in revenues.
However, fixed costs will be difficult to bring down in lock step with order declines. Industrial companies simply have huge fixed costs imbedded into their cost structure. Owners can expect fixed costs to total 35% - 55% of revenues in these companies. When modeling likely profitability in the medium term future, Owners should attempt to model changes in fixed and variable costs.
Gudovac modeled the profit implications for ABB of a 25% decline in orders/revenues. Such a decline results in a Enterprise which is near breakeven profitability. This change has profound implications for the stock price. In ABB's case, Gudovac calculated that ABB stock price might drop by 75% from its current elevated heights.
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Don't Get Massacred !
Gudovac1941
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