Aziz Shamuratov
About a year ago I was wondering if Emerson Electric (NYSE: EMR) Is the “winner” in the National Instruments bidding competition.The acquisition is the latest in a series of major mergers and acquisitions, both on the buy and sell side, creating a number of Moving parts.
Once the dust settles, Emerson can focus on execution as 2024 is off to an impressive start and the stock price looks quite reasonable given the strong positioning and current operating results.
Transform your business
Emerson Electric has been a business that continues to focus on its strategy to become more diversified and better positioned over time by focusing more on higher growth and higher margin businesses. All of this makes strategic sense, but it all depends on execution and the price paid for the acquisition and the benefits gained from selling non-core assets.
Back in 2021, Emerson was an $18 billion diversified industrial company, with about two-thirds of its sales coming from its automation solutions business and the rest from its commercial and residential solutions businesses. Both segments have profit margins of approximately 20% and earnings per share of approximately $4.50. At a net debt load of $4.3 billion (essentially equal to adjusted EBITDA), leverage looks reasonable, as the same applies to the stock’s trading valuation of $90 per share.
Business begins to transform as company acquires majority stake Aspen Technologies (AZPN) In a somewhat complex transaction involving significant cash investments and asset contributions.
The company subsequently sold its InSinkErator business to Whirlpool (WHR) In 2022, a $3 billion deal. The company also announced the sale of a majority stake in its climate technology business, part of its commercial and residential business, to Blackstone in a $14 billion deal.
These are fairly complex transactions, as the company acquired National Instruments for $8.2 billion in 2023, eliminating its net cash position following deals with Whirlpool and Blackstone. This latest deal is expected to add $1.7 billion in automation sales, although it’s somewhat of a transformation story, and there will be huge synergies going forward.
Last April, among the many moving parts, I was a bit over-exaggerated when the shares were trading in the mid-eighties. With profitability fixed at around $4 and changing, and leverage around 2x, I took a wait-and-see approach. After all, I want to see how well all trades perform in terms of actual profit contribution and leverage.
Coming soon
The stock has traded primarily in the $80 to $100 range since last April, although the stock has recently risen convincingly to its current level of $112 per share.
In May last year, Emerson fully Previously announced deal with Blackstone.All summer long, Emerson declare Additional transaction to acquire German company FLEXIM. The transaction adds approximately 450 employees to Emerson, but financial details of the acquisition were not disclosed.Later in the summer, the company declare Another acquisition is Switzerland-based Afag Holding, a leader in electric linear motion, feed and handling automation solutions.
October, Emerson fully The acquisition of National Instruments creates a more balanced situation, as the moving part appears to be over.
New test preparation base
November, Emerson report Its 2023 results showed sales grew 10% for the year to $15.2 billion, but these comparisons are of course adjusted for the impact of some mergers and acquisitions. The company reported pre-tax operating margin of 18% of sales and EBITDA of $3.8 billion.
Adjusted earnings per share were $4.44, an increase of 22% from the previous year. This compares to GAAP earnings of $3.72 per share for the year, with the difference primarily related to the costs involved in the transaction efforts. As the acquisition of National Instruments closes at the end of this year, the company expects sales to grow by about 14% in 2024, which would mean sales of nearly $17.5 billion and an underlying sales growth rate of 5% at the mid-point.
Adjusted earnings per share are expected to improve to the mid-range of $5.25 per share, while GAAP earnings are expected to be in the mid-range of $3.92 per share, with half of the difference related to amortization charges and the remaining costs related to transaction expenses.
February, Emerson here we go Results for 2024 are very strong, with quarterly sales growing 22% to $4.1 billion and underlying sales growing 10%. Margins also improved, with the company reporting adjusted earnings of $1.22 per share, while GAAP earnings per share fell by nearly $1.
Following the strong quarter, full-year sales are expected to hit the mid-range of $17.6 billion, with adjusted earnings now expected to hit the mid-range of $5.375 per share, giving investors confidence in the path management is pursuing. . Given the strong first quarter, the upgrade to full-year guidance even seemed conservative, of course, as the company raised its synergy target from National Instruments by $20 million to $185 million.
Net debt was reported at $8.8 billion, but that definition excludes a $3.3 billion investment in Copeland (in the form of notes receivable and equity investments). Excluding Copeland’s stake, the leverage ratio is just over 2x, which is a pretty reasonable multiple.
Now?
The truth is, after all the changes, Emerson appears to have made all the right moves here, as the outlook for 2024 is reassuring while also looking conservative after the blowout first quarter.
Thanks to 66 years of uninterrupted dividend payments, the current dividend is $2.10 per share and the yield is close to 2%. Trading at 21 times adjusted earnings and 2 times leverage, the situation looks largely fair as Emerson deserves such a premium valuation.
On the other hand, the lukewarm hard sales and earnings numbers haven’t changed much from a decade ago, despite the fact that the company’s stock price base has shrunk significantly since that time.
Amid all this, I’m playing a balancing act, as the outlook for the year looks a bit conservative, but there’s the potential for more upside surprises. That being said, the share price has performed quite well in recent weeks, making the valuation here largely fair, although Emerson’s greater transparency opens the door to bargain hunting.
