Emerson Bracing For A Slowdown And Considering Its Options

Back in May I thought that Emerson (EMR) looked undervalued, as I thought the Street was underestimating the full-cycle potential of the process automation business (particularly its petrochemical leverage), as well as the Climate segment. Since then, the shares have roughly doubled the return of the larger industrial sector, as cautious guidance from management has been offset by the involvement of an activist investor and investor enthusiasm for potential restructuring up to and including the break-up of the company.

I’m fairly indifferent about a break-up; I don’t think the Commercial and Residential Solutions adds a lot of value, but I also don’t think it really hurts the company all that much. As management seems far more interested in investing in the Automation Solutions business, perhaps it makes more sense to spin off the CRS segment or sell it in parts to other companies. Either way, while I do think process automation markets will slow in 2020, I don’t think they’re going to go negative and I like the long-term pipeline.

Unfortunately, the share price appreciation has pretty much soaked up the undervaluation I saw before and Emerson is valued on par with other high-quality industrials. Granted, with Emerson’s strong leverage to LNG liquefaction and chemical sector capex, as well as its growing discrete/hybrid business, I think you can make a “best of the rest” argument.

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Emerson Bracing For A Slowdown And Considering Its Options