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Nearly a year ago I posted some thoughts on this platform after Emerson Electric (NYSE:EMR) announced a complicated deal to acquire AspenTech, after a period in which the company has been simplifying its operations.
A Quick Recap
Emerson Electric is a diversified industrial play which generated $18.2 billion in fiscal 2021 sales, reported late last year. The company reports results for two different segments. An $11.6 billion automation solution segment, which posts margins of 18%. This segment is complemented by a $6.7 billion commercial and residential solutions business, which posts margins just in excess of that, reported at 21% of sales.
The company reported adjusted earnings of $4.51 per share as the adjustments looked quite fair, while the company guided for modest growth in 2022, both in terms of sales and earnings. A net debt load of $4.3 billion was relatively modest, largely in line with reported EBITDA.
With 601 million shares trading at $91, a $55 billion equity valuation translated into a 20 times earnings multiple reported for 2021. With a $60 billion enterprise valuation, the company is quite large, and given the state of its balance sheet, it announced a complicated deal late last year as well.
After all, Emerson announced its intention to acquire a majority stake in AspenTech, while simultaneously including its own OSI and Geological Simulation assets at a $2.5 billion valuation into the deal. Emerson would furthermore fork over $6 billion to own 55% of the equity in the new company.
While shares of AspenTech reacted well, I believed the deal was complicated and looked quite expensive, making me very cautious. Calling a $91 stock price fair to slightly appealing at the time, given the transformation efforts, I was not a holder of the shares after a complicated and expensive deal with AspenTech.
And Now?
In the year since I last looked at Emerson, shares have traded in a $70-$100 range, now settling hands at $96 per share. After the first quarter earnings report, the company hiked the full year guidance, now seeing adjusted earnings top the $5 per share mark at the high end of the range. The company hiked the guidance again following the release of the second quarter results, despite the geopolitical tensions.
After announcing a few bolt-on deals during the year, and closing on the AspenTech acquisition, the company announced a substantial deal in August. Emerson reached a $3.0 billion deal to sell its InSinkErator business, which manufactures food waste disposers and related items, to Whirlpool (WHR). With this deal, $595 million in sales and $148 million in operating earnings will leave the door, indicating that a full price has been fetched. A few days later the company hiked the adjusted earnings guidance to as much as $5.05-5.10 per share.
The real big news came in October, as Emerson announced the sale of a majority stake in its climate technologies business (part of its commercial and residential business) to Blackstone, valuing the entity at $14 billion. This includes HVAC and refrigeration assets which generated $5.0 billion in sales, as the company will fetch $9.5 billion in pre-tax proceeds, while maintaining a 45% minority stake in the business.
On the same day, the company announced its 2022 results with full year sales up 8% to $19.6 billion and adjusted earnings per share up 16% to 5.25 per share. The company reported results from continuing operations at the same time, posting sales of $13.8 billion and adjusted earnings of $3.64 per share, accounting for the two latest divestments.
Current net debt of $4.2 billion would likely turn into a net cash position of $8 billion as the company will retain a minority share in the divested climate technology assets a likely a billion or two as well, for really a pro forma net cash position around $10 billion. With 595 million shares outstanding, net cash is equal to about $17 per share, which means that operating assets now trade around $80 per share.
With pro forma earnings power at $3.64 per share, that valuation looks demanding, yet Emerson claims continued improvements in the positioning here. This is seen in the 2023 outlook which calls for underlying sales growth at a midpoint of 7.5% and earnings between $4.00 and $4.15 per share, albeit the later component of the guidance includes the assumption of $2 billion in buybacks already, sufficient to buy back around 3% of the float here.
What Now?
The move which Emerson has announced makes sense, selling out of slower growth and lower margin businesses to do the opposite, but an IPO or spin-off might have been an option as well. The issue is that if you do such transformation at scale and with many moving parts, but moreover execute at wrong prices, a lot of value and or earnings power could go up into smoke. For that, just talk to investors in GE over the past couple of years, or even decades.
The reality is that Emerson appears to be doing a good job, but the many moving parts make it hard to see the real picture emerge here, as activity is perhaps too high here and too complex. Nonetheless, I like the overall strategy and the remaining business, as earnings multiples of this business surpass 20 times. This looks rich given the current interest rate environment, yet if underlying sales growth really comes in around 10% and more gains are seen, this could prove to be cheap.
For me Emerson is now a hold, albeit given these cash holdings, any dips to the mid-$80s will be used as an interesting long-term entry point.
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