Emerson Looks Right - Right Place, Right Assets, Right Time, Right Valuation

 

At this point in the cycle, it’s pretty common for short-cycle industrials to slow and pass the baton on to companies with greater mid-to-late cycle exposure, and a process automation company like Emerson (EMR) fits that bill. On top of that, I like Emerson’s commitment to restructure around core secular growth opportunities, gradually shift away from oil/gas, and pursue long-term 30% incremental margin targets.

I was neutral on Emerson back in September largely on valuation (a bit on cycle timing too), and the shares are down about 10% since then, underperforming the larger industrial space, but holding up against other automation and HVAC/refrigeration names. While Russia’s invasion of Ukraine puts a great deal more macro risk on the table, and Emerson isn’t the cheapest industrial out there, I think the pieces are coming together to make this a more exciting idea now.

 

Click here to continue: 

Emerson Looks Right - Right Place, Right Assets, Right Time, Right Valuation

Emerson Offers Portfolio Transformation And Leverage To Process Market Recoveries

 

Writing about Emerson (EMR) in February, I said that while I thought the shares weren't all that cheap on an absolute basis, they still had some appeal as a "first among peers" pick within high-quality industrials and offered leverage to an eventual recovery in process end-markets. Since then, the shares have outperformed the S&P 500 and broader industrial sector, as well as Siemens (OTCPK:SIEGY), though haven't quite kept pace with ABB (ABB) or Rockwell (ROK) within the automation space.

My feelings haven't really changed that much. Discrete and hybrid automation markets are leading the recovery, but activity in process industries is picking up, and Emerson still has opportunities to grow its presence in more attractive markets like life sciences/biopharma. On top of that, I think there's meaningful portfolio transformation potential here. Valuation still isn't appealing on an absolute basis, but looking at what other industrials trade for, Emerson's better margins and returns (ROIC, ROA, ROTA), not to mention exposure to later-cycle markets, should merit at least a peer-level forward multiple.

 

Read more here: 

Emerson Offers Portfolio Transformation And Leverage To Process Market Recoveries

Emerson Shows It's Serious About Adding To Its Software Capabilities

It didn’t take long for Emerson (EMR) to deliver on management’s pledge to add more software assets to the portfolio. While Emerson had been rumored to be in the bidding for OSIsoft, which is being acquired by Schneider’s (OTCPK:SBGSY) AVEVA (OTCPK:AVVYY), they ended buying a different OSI – announcing a $1.6 billion deal for utility automation software company Open Systems International (or “OSI”).

The multiple that Emerson is paying does give some reason for pause, but this is basically the going price for this kind of asset now, and I’m sure OSI wouldn’t have had much difficulty finding another willing buyer. In any case, I like the deal for Emerson, as it broadens the company’s exposure to utilities, adding transmission and distribution (or T&D) to its existing power gen offerings, and gives the company greater leverage to growth in grid automation. This deal doesn’t really change my views on Emerson shares; Emerson is valued like the high-quality industrial that it is.

Follow this link for the full article: 

Emerson Shows It's Serious About Adding To Its Software Capabilities

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.

Click here to continue:
Emerson Bracing For A Slowdown And Considering Its Options

New Tariffs Create New Headaches For Rockwell Automation

At the time of Rockwell’s (ROK) fiscal second quarter earnings report in late April, I commented that I thought investors would have an opportunity to buy shares in this high-quality automation enabler at a lower price. Since then, the shares have dropped more than 15%, significantly underperforming industrials in general, on growing concerns about a slowdown in the industrial end-markets that make up a large part of the discrete automation market. Now with the prospect of significant tariffs on Mexico on the table, Rockwell is taking another body-blow.

I do believe that Rockwell management is underestimating the risk of a broader slowdown in industrial end-markets, even though I do basically agree with its more bullish medium-to-long-term outlook. With a real risk of a “lower-for-longer” end-market demand situation and now potential pressures from new tariffs, I’m inclined to keep waiting even though Rockwell shares now trade below my estimate of fair value.

Click here for more:
New Tariffs Create New Headaches For Rockwell Automation

ITT Overlooked And Undervalued As A Late-Cycle Play

I'm not sure it's entirely appropriate to call a stock followed by over a dozen sell-side analysts and widely-owned by institutions "overlooked", but I don't get the sense that ITT (ITT) is as widely-known among investors as it should be. And, that's a shame. ITT isn't perfect, but I like this diversified industrial's philosophy of adopting best practices irrespective of their source, not to mention broad late-cycle exposure and a strong growth auto business.

Below the mid-$60s, I think ITT is undervalued. While there is some asbestos liability here, I believe it is well-covered, and the company has the dry powder available to make select acquisitions to build out its operations further. I believe the perception of the auto business has already corrected, and ITT's short-cycle industrial exposure is moderate, and so I believe this is a good time and place to consider this name.

Click here to continue:
ITT Overlooked And Undervalued As A Late-Cycle Play

Emerson Stumbles Again On Margins, But The Long-Cycle Story Still Has Appeal

When I last wrote about Emerson (EMR), I tempered some of the undervaluation I thought I saw with the comment that, “… I have some concerns that the shares could underperform as investors look for more exciting stories.” Prior to a recent sell-off, Emerson shares had more or less been drifting around the sector averages, but lagged the likes of Ingersoll-Rand (IR), Honeywell (HON), and Yokogawa (OTCPK:YOKEY). Actual results did show further slowing in the business, but this looks more like a pause than a real shift.

I do think process automation order momentum has probably peaked, but there’s a rich project funnel to deliver on over the next few years, and I think Emerson has meaningfully improved its process automation operations after the Pentair (PNR) deal. Further progress in discrete and hybrid markets would be gravy on top of that. I do have some concerns about the Climate business, but not enough to cancel out what looks like a relatively undervalued opportunity in an expensive industrial sector.

Click here for more:
Emerson Stumbles Again On Margins, But The Long-Cycle Story Still Has Appeal

Roper's Growth Engine Keeps Humming

As a multi-industrial increasingly driven by its high-margin, asset-light software businesses, Roper (ROP) continues to diverge from the broader multi-industrial category in generally positive ways. Management has built a solid value-compounding engine here, and Wall Street is quite well aware of that, with the shares up another 30%-plus over the trailing twelve months. I do expect Roper to continue to deliver better-than-average organic growth with improving margins, and I believe Roper has a repeatable formula here for successful M&A, it’s increasingly difficult for me to see value in the shares. Yes, there are investors in companies like Roper and Danaher (DHR) that will argue for buying irrespective of valuation, but that’s not my approach and I think shareholders should at least be aware of the risks if Roper’s engine ever has a hiccup along the way.

Read more here:
Roper's Growth Engine Keeps Humming

Rockwell Skids On A Weaker Auto End-Market

The last three months haven’t been particularly kind to Rockwell (ROK), as the share price of what is usually a darling among industrials has lagged the broader industrial sector, and automation peers like Yaskawa (OTCPK:YASKY), Fanuc (OTCPK:FANUY), Nidec (OTCPK:NJDCY), Emerson (EMR), Schneider (OTCPK:SBGSY), and even ABB (ABB). To be fair, it was the significant slide after second quarter earnings on Thursday that did the damage, though the shares had still been lagging most automation companies (except ABB) and were only slightly better than the average industrial before the report.

Like 3M (MMM), Sandvik (OTCPK:SDVKY), SKF (OTCPK:SKFRY), Illinois Tool Works (ITW), and the Japanese automation companies, weakness in autos is a major contributor to Rockwell’s present weakness, but I took management’s guidance and comments as reflective of some potential warnings about spreading weakness in other industrial end-markets – something that I’ve been expecting as this year rolls on. Rockwell shares are now in a tough situation valuation-wise; they’re not so clearly undervalued that I’m inclined to say “just buy and wait for the cycle to reverse), but the valuation is getting more reasonable and this is a stock to watch more carefully now.

Read more here:
Rockwell Skids On A Weaker Auto End-Market

Few Sour Notes For Honeywell

At the risk of drifting into the territory of a broken record, Honeywell’s (HON) performance continues to back up my view of the company as one of the best multi-industrials today. With Honeywell’s longer-cycle businesses hitting the sweet spots of their cycles, the company’s growth is finding another gear at a time when shorter-cycle results are likely to be choppier.

With its core businesses doing well (and with runways to do even better) and ample capacity to do more M&A, but no particular necessity, the only issue I have with Honeywell is, predictably enough, the price. It’s tough for me to push my valuation models beyond a fair value of $170 today, and I think Honeywell is now enjoying the status as a Wall Street darling and growth safe haven. Honeywell has earned this love and I wouldn’t advise stepping in front of this freight train, but it’s tougher to get excited about the returns on offer from this high level.

Read it all here:
Few Sour Notes For Honeywell

ABB Still Has A Lot To Do And A Lot To Prove

Owning ABB (ABB) has not been a particularly rewarding experience. While the company's decision to sell its Power Grids business to Hitachi is a sound one, and the company has attractive opportunities across its business units, a long history of underperformance relative to the opportunities available is not something investors should just ignore.

Valuation, and the idea that ABB can be/do better than this, remain the best arguments for sticking with the stock, but that's an increasingly unconvincing argument to me, and I can't really say that you should favor ABB over Eaton (ETN), Schneider (OTCPK:SBGSY), and Honeywell (HON), let alone a long list of other industrial names.

Read the full article here:
ABB Still Has A Lot To Do And A Lot To Prove

Schneider Slowing, But May Be Better Positioned For The Downturn Than The Street Thinks

Concerns have been growing about the health and durability of the short-cycle upturn, and the performance of the stocks of companies like Schneider Electric (OTCPK:SBGSY) have reflected at least some of that. While a strong post-earnings run has lifted Schneider’s performance over the average industrial and peers like Eaton (ETN) and Rockwell (ROK) since my last update, the shares spent most of the second half of 2018 lagging broader industrial indices.

I’ve made no secret of my concerns about a slowdown in the global economy, and as it pertains to Schneider, I am concerned about the near-term outlook for non-residential construction and factory automation. On the other hand, Schneider isn’t as short-cycle-dependent as in the last cycle, and the company’s position in process automation, oil/gas, grid automation, and data center could help offset some of the weakness. With a long-term growth outlook roughly similar to Emerson (EMR), and sandwiched between Eaton and Rockwell, I do think these shares are undervalued, but 2019 could be a tricky year for the stock as sentiment has seemingly shifted to a point where there is a “show me” story.

Continue here:
Schneider Slowing, But May Be Better Positioned For The Downturn Than The Street Thinks

A Tug Of War With Alfa Laval Between Weak Sentiment And Post-Peak Growth

The market definitely didn’t like Alfa Laval’s (OTCPK:ALFVY) fourth quarter earnings, and particularly the parts of the call where management said things like first quarter demand being “somewhat higher” than the fourth quarter and that demand was “nearing the peak” for the cycle. Although Alfa shares are up slightly from my last update on the company, the shares lost about 10% of their value in the immediate aftermath of the fourth quarter report and have since recovered about half of that.

Operationally, I like Alfa Laval. I think this is a well-run company with good exposure to late-cycle end-markets, but I also know that orders are likely to slow dramatically in 2019, with revenue and earnings following in 2020 and 2021. These shares do look undervalued now, and I think the market may be overlooking opportunities in HVAC, power gen, life sciences, and ballast water treatment, but the reality is that fighting the tape is tough and investors are going to need to have some patience with this one.

Continue here:
A Tug Of War With Alfa Laval Between Weak Sentiment And Post-Peak Growth

Roper Getting Its Due As A Differentiated Value-Creator

Exclude valuation from the conversation, and I’m not sure how many negatives you can really come up with for Roper (ROP). Not only has Roper shown that it can identify, execute, and integrate acquisitions just as well as peers like Danaher (DHR) but management has used M&A to transform the business into a self-funding, niche-focused, asset-light multi-industrial with a very strong recurring revenue component driven by a diverse SaaS and medical/healthcare business. Although the ROIC is lower than you might otherwise expect, that doesn’t trouble me much given the strong demonstrated cash flow generation ability.

Roper isn’t cheap by any approach I use, but I do like the company’s end-market exposures and business model for this point in the cycle, as well as the “dry powder” the company has to make further value-enhancing acquisitions. And while the shares aren’t cheap, they’re not too far from my DCF-based fair value and this would be a very tempting name on another market sell-off.

Click here for more:
Roper Getting Its Due As A Differentiated Value-Creator

Eaton Hitting Its Marks, But Still A Controversial Name

This fourth quarter earnings and guidance season has gone a little better than expected, with many companies having fine-tuned their guidance before the end of 2018 and defanging some of the potential disappointment here in January and February. Even so, there is still a lot of uncertainty regarding the health of the U.S. and global economies, with multiple multi-industrials (including Honeywell (HON), Illinois Tool Works (ITW), and 3M (MMM) ) establishing some rather low numbers for the low end of their 2019 growth outlooks.

I continue to like Eaton (ETN), even if more on a relative, “it’s not that bad” basis. I am definitely concerned about the risk of slowing demand in “general industrial”, trucks, off-road machinery, and non-residential construction, but management’s guidance for the year was fairly encouraging and markets like aerospace and data center are still looking healthy. With skepticism already seemingly built into the valuation, Eaton is a name that could surprise if 2019 proves to be better than expected for the U.S. and global economies.

Read more here:
Eaton Hitting Its Marks, But Still A Controversial Name

Rockwell Automation Still Poised Between Excellence And Uncertainty

Looking into 2019, Rockwell Automation (ROK) seems to be in familiar territory – nobody’s really questioning the operational excellence of this leader in discrete automation, but there are plenty of concerns about end-market health, where industrials sit in the cycle, and whether Rockwell is as well-positioned for the next phase of automation as it was for the last.

I typically shoot for double-digit returns when I invest, and Rockwell doesn’t seem priced to deliver that unless you think long-term FCF growth can reach that grey area between mid-single-digits and high single-digits – a level of performance that’s not impossible, but certainly not conservative to expect. Although I’m tempted to call today’s potential returns “good enough” for a stock that seldom gets all that cheap unless/until industrial stocks really go fan-ward, I do believe there could be another round of angst and stock weakness early in 2019 that could be an opportunity to pick up high-quality industrials like Rockwell.

Continue here:
Rockwell Automation Still Poised Between Excellence And  Uncertainty

Honeywell Looks Well-Positioned In A More Uncertain Environment

As multiple short-cycle industrial sectors appear to be slowing, Honeywell (HON) looks like a pretty good option going into 2019. This conglomerate’s third-quarter earnings had a lot of moving parts, but the aerospace, safety, productivity, automation, and specialty chemical operations all appear to be in good shape, and the company continues to make progress with its free cash flow conversion. With management taking renewed aim at fixed costs and very likely to deploy significant capital into additional M&A in 2019 and beyond, I like Honeywell’s positioning as both a shorter-term safe haven and longer-term winner.

Read more here:
Honeywell Looks Well-Positioned In A More Uncertain Environment

ABB Still Spinning Its Wheels

Every investor has their “enough” point, and I’m getting there with ABB (ABB). Despite a pretty healthy environment for electrical and automation products in general, and strong market positions in many of those markets, ABB has spent a lot of its recent history going nowhere fast, pulled down by weakness in the Power Grids business, weak utility demand, and a series of ongoing restructuring and M&A integration initiatives. Comparisons to companies like Honeywell (HON) aren’t really fair, but it has been a while since ABB investors really had a lot to cheer about, and third quarter results don’t really seem to represent a break with that trend.

Read more here:
ABB Still Spinning Its Wheels

For ABB, It's About Cycle, Self-Improvement, And Sentiment

A laggard for some time among the industrial automation and electrification players, ABB (ABB) has at least been a little “less bad” of late as sentiment has started giving the company some credit for its later-cycle end-market exposures. Now the question is whether those promising-looking exposures will deliver actual orders in the second half of the year and drive better revenue in 2019. At the same time, there is still more than casual interest in ABB’s willingness and ability to execute on some self-help moves that would largely involve slimming down and simplifying the business.

I’ve long been an owner and supporter of ABB, and I can’t say that it has done right by me. Still, compared to peers like Emerson (EMR) and Rockwell (ROK), the valuation is undemanding and offers some upside if ABB can deliver on those sentiment-shifting improvements in orders and portfolio composition.

Read the full article here:
For ABB, It's About Cycle, Self-Improvement, And Sentiment

Emerson Seeing Very Healthy Process Markets And Reinvesting In Hybrid Competitiveness

The good times keep rolling for Emerson (EMR), as the company is enjoying a strong recovery/expansion phase in its core process markets, as catch-up spending on MRO, brownfield investments, and greenfield projects all combine for strong near-term revenue and margin improvements and a healthy outlook over the next year or two. At the same time, Emerson continues to reinvest in its business to better-position it for less cyclicality and better competitiveness in hybrid automation markets.

As was the case a few months ago, I see Emerson as a so-so value proposition, but a stronger near-term growth/momentum story. The shares don't seem unreasonably priced on forward EBITDA, but it's a little harder to see strong FCF-based undervaluation, and I think the share price performance is very much tied to ongoing momentum in orders, revenue, and margin leverage.

Read more here:
Emerson Seeing Very Healthy Process Markets And Reinvesting In Hybrid Competitiveness