Emerson Electric, one of the world’s largest engineering groups, has been hit hard by fears of a savage slump in global infrastructure spending as recession takes hold. The stock price has almost halved in the past five months. But even in the face of recession, I believe this stock is a good long-term investment.
Emerson Electric (NYSE: EMR), rated a BUY by Longbow Research
Emerson makes electric motors, back-up power supplies, industrial automation equipment, air-conditioning units and construction tools, among other things. A full 54% of revenues come from outside the US. Recent profitability has been hit by the spiralling cost of raw materials such as steel. But with the prices of commodities tumbling, future margins should be somewhat insulated from shrinking demand. The group also owns a diversified portfolio of short and long-cycle businesses that should partly counter-balance each other in a downturn – especially as 30% of revenues come from the more-resilient emerging nations.
While challenging, the 2009 outlook is nowhere near as gloomy as the stock price suggests. At the quarterly results on 4 November, the board re-affirmed its target of 5%-7% top-line growth over the economic cycle. Emerson expects 2009 turnover, underlying earnings per share (EPS) and free cashflow to be around $24.5bn, $3.00 and $2.7bn respectively. The balance sheet is strong, with interest payments comfortably covered on its net debt of $2.7bn. After several contract wins, the order book is healthy too. For income seekers, Emerson pays a 4% yield. The group has paid and raised its cash dividend each year since 1947, even during the harshest of storms.
Are there any catches? Emerson’s fortunes would be hit if there’s a severe recession, possibly triggering order cancellations and/or a significant slump in capital spending worldwide. It is also exposed to foreign-exchange fluctuations, and competes against other heavyweights such as Siemens, ABB, GE and Philips. But with vast geographical reach, strong positions in most of its markets, and trading on an undemanding earnings multiple of ten, Emerson looks a good long-term bet. Longbow has a price target of $45 a share on the stock.
Recommendation: BUY at $34.18
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.