Emerson Electric (EMR): Buy, Sell, or Hold Post Q2 Earnings?

Emerson Electric trades at $132.65 per share and has stayed right on track with the overall market, gaining 18.6% over the last six months. At the same time, the S&P 500 has returned 15.7%.

Is there a buying opportunity in Emerson Electric, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Is Emerson Electric Not Exciting?

We're sitting this one out for now. Here are three reasons why EMR doesn't excite us and a stock we'd rather own.

1. Long-Term Revenue Growth Flatter Than a Pancake

A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Emerson Electric struggled to consistently increase demand as its $17.78 billion of sales for the trailing 12 months was close to its revenue five years ago. This wasn’t a great result and is a sign of lacking business quality.

2. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Emerson Electric’s margin dropped by 4.9 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity. Emerson Electric’s free cash flow margin for the trailing 12 months was 14.1%.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Emerson Electric’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Emerson Electric isn’t a terrible business, but it doesn’t pass our quality test. That said, the stock currently trades at 20.9× forward P/E (or $132.65 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at our favorite semiconductor picks and shovels play.

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