Aziz Shamuratov
About a year ago, I wondered if Emerson Electric (NYSE:EMR) was the “winner” in the bidding race for National Instruments. This acquisition was the latest in a number of substantial M&A actions (both on the buy and sell side) which created a lot of moving parts.
After the dust has settled, Emerson can focus on execution as the start to 2024 has been impressive, as shares look quite reasonably priced given the strong positioning and current operating performance.
Transforming The Business
Emerson Electric has been a business which has continuously focused on its strategy, over time focusing more on higher growth, and higher margin businesses, in order to become more diversified and better positioned. All this makes strategic sense, but it all depends on the execution, as well as the prices paid for acquisitions, as well as the proceeds obtained from selling non-core assets.
Back in 2021, Emerson was an $18 billion diversified industrial play, with about two thirds of sales generated from its automation solutions business, and the remainder from the commercial & residential solutions business. Both segment posted segment margins around 20% with the business posting earnings around $4.50 per share. Amidst a net debt load of $4.3 billion, which was largely equal to adjusted EBITDA, leverage ratios looked reasonable, as the same applied to the valuation with shares trading at $90 per share.
The business went into transformation as the company acquired a majority stake in Aspen Technology (AZPN) in a somewhat complicated deal which involved a big cash investments and contribution of assets.
The business subsequently sold its InSinkErator business to Whirlpool (WHR) in 2022 in a $3 billion deal. The company furthermore announced the sale of a majority stake in the climate technology business (as part of the commercial and residential business) to Blackstone in a $14 billion deal.
These were all quite complicated deals as the company acquired National Instruments deal in an $8.2 billion deal in 2023, wiping out the net cash position following the deals with Whirlpool and Blackstone. This latest transaction was supposed to add $1.7 billion in automation sales, although this was somewhat of a transformation story, with substantial synergies seen down the road.
Amidst the many moving parts, I was a bit overblown in April of last year, when shares traded in the mid-eighties at the time. Pegging earnings power around $4 and change, with leverage seen around 2 times, I was taking a wait-and-see approach. After all, I was looking to see how all deals would pan out in terms of actual earnings contribution and leverage.
Coming To Live
Since April of last year, shares have largely traded in the $80-$100 range, although recently, shares have seen a convincing move higher towards current levels of $112 per share.
In May of last year, Emerson completed the previously announced deal with Blackstone. Over the summer, Emerson announced a bolt-on deal to acquire German-based FLEXIM Flexible Industriemesstechnik. The transaction adds about 450 workers to Emerson, with no financial details being announced on the purchase. Later in the summer, the company announced another purchase, this time acquiring Swiss-based Afag Holding, a leader in electric linear motion, feeding and handling automation solutions.
In October, Emerson completed the purchase of National Instruments, creating a bit more balanced picture as the moving parts seem to have come to an end here.
The New Pro Forma Base
In November, Emerson reported its 2023 results, a year in which sales grew by 10% to $15.2 billion, but these comparisons are, of course, adjusted for some M&A impact. The company posted pre-tax operating profit margins of 18% of sales on a $3.8 billion EBITDA number.
Adjusted earnings per share were reported at $4.44 per share, up 22% on the year before. This compares to GAAP earnings of $3.72 per share for the year, with the discrepancy largely relating to costs involved with the dealmaking efforts. With the purchase of National Instruments closing just after the end of the year, the company guided for 2024 sales to rise by around 14%, which implies that sales are seen close to $17.5 billion, with underlying sales growth seen at a midpoint of 5%.
Adjusted earnings per share are set to improve to a midpoint of $5.25 per share, with GAAP earnings seen at a midpoint of $3.92 per share, with half the discrepancy relating to amortization charges, and the remainder of costs related to dealmaking charges.
In February, Emerson started the year 2024 on a very strong note, with reported quarterly sales up 22% to $4.1 billion, as underlying sales growth was reported at 10%. Margins improved as well, with the company posting adjusted earnings of $1.22 per share, with GAAP earnings coming in nearly a dollar per share lower.
Following the stronger quarter, full-year sales are seen at a midpoint of $17.6 billion, with adjusted earnings now seen at a midpoint of $5.375 per share, giving investors confidence in the road pursued by management. Given the strong beat in the first quarter, the hike in the full-year guidance even looks conservative, certainly as the company upped the synergy target from National Instruments by twenty million to $185 million.
Net debt was reported at $8.8 billion, but that definition excludes a $3.3 billion investments in Copeland (in the form of notes receivables and equity investments). Excluding the stake in Copeland, leverage is seen just over 2 times, a fair multiple.
And Now?
The truth is that following all the moving parts, it seems that Emerson has made all the right moves here, as the outlook for 2024 is comforting and looks conservative at the same time after a blowout first quarter.
With 66 years of uninterrupted dividends being paid, a current payout of $2.10 per share yields a yield near 2%. Trading at 21 times adjusted earnings and with leverage seen at 2 times, the situation looks largely fair, as Emerson rightfully deserves this premium valuation.
On the other hand, the cold hard sales and earnings numbers have not altered so much from the period a decade ago, although that truth be told is that the company has shrunk the share base quite a bit since that period of time.
Amidst all this, I am performing a balancing act as the outlook for the current year looks a bit conservative, with potential for more upside surprises. That being said, shares have done quite alright in recent weeks, making the valuation largely fair here, although the greater clarity on Emerson opens the door to buy the dip here.