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By Barbara Noverini | 12-02-2015 02:00 PM

Undervalued Emerson Will Weather 2 Storms

Despite headwinds from energy and China, this wide-moat industrial firm's competitive advantages will protect healthy returns on invested capital over the long run.

Barbara Noverini: We encourage investors with a long time horizon to take another look at wide-moat Emerson Electric (EMR), which is trading at about a 20% discount to our fair value estimate and offers an attractive dividend yield close to 4%.

Shares sold off earlier in the year because of two significant headwinds. First, approximately one third of Emerson's sales touch the energy supply chain, mainly through the process-management segment, which provides automation solutions to oil and gas exploration companies, pipelines, and refineries. While the exposure is significant, we maintain that this segment is one of Emerson's strongest in terms of installed base and leading market position and will mitigate an extended downturn by maintaining cost discipline and focusing on a profitable aftermarket revenue stream.

Secondly, about 12% of Emerson's sales come from China, and fears of a slowdown in this important economy are reflected in the company's share price. We expect these headwinds to persist through 2016; however, we believe that the competitive advantages inherent in Emerson's wide moat will protect healthy returns on invested capital over the long run, particularly as the company shifts its portfolio toward its strengths in process automation, electrical distribution, climate, and controls. 

In addition, we expect the planned divestiture or spin-off of the company's network-power segment in 2016 could act as a near-term catalyst for the name--freeing capital, time, and talent to reinvest in support of Emerson's "moatiest" businesses.

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