Emerson Electric Sees Strong Demand in Process Markets

A Member of Pat McKeough’s Inner Circle recently asked for his advice on Emerson Electric, a global industrial technology leader specializing in automation solutions, intelligent devices, and industrial optimization software systems.

Pat likes the firm’s robust financial performance as it transforms itself into a high-growth, high-margin business. He also notes the strong cash flow generation. However, the company is vulnerable to economic cycles including the overall performance of the global economy.

EMERSON ELECTRIC CO. (Symbol EMR on New York) is an industrial company with two primary operating business groups: Intelligent Devices (75% of revenue) and Software and Control (25%).

The Intelligent Devices division has four segments:

Final Control is a global provider of control valves, isolation valves, shutoff valves, pressure relief valves, pressure safety valves, actuators, and regulators for process and hybrid industries.
The Measurement & Analytical segment is a leading supplier of intelligent instrumentation measuring the physical properties of liquids and gases, such as pressure, temperature, level, flow, acoustics, corrosion, pH, conductivity, water quality, toxic gases, and flame.
The Discrete Automation segment includes solenoid valves, pneumatic valves, valve position indicators, pneumatic cylinders and actuators, air preparation equipment, pressure and temperature switches, electric linear motion solutions, programmable automation control systems and software used in discrete industries (specialty manufacturers).
The Safety & Productivity segment offers tools for professionals and homeowners.

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The Software & Control division has three segments:

The Control Systems & Software segment provides control systems and software that manage plant processes by collecting and analyzing information from measurement devices in the plant and using that information to adjust valves, pumps, motors, drives and other control hardware for maximum efficiency and safety.
AspenTech (symbol AZPN on Nasdaq--Emerson controls AspenTech with a 57% stake)
is a global leader in asset optimization software that lets industrial manufacturers design and maintain their operations at maximum performance.
Test & Measurement. Emerson completed the acquisition of National Instrument in October 2023 (see below) to expand in this market. Test & Measurement provides software-connected automated test and measurement systems that let enterprises bring products to market faster and at a lower cost.

Emerson Electric: Strategic acquisitions bolster company’s software and control offerings

Prior to the arrival of COVID-19, Emerson was re-thinking its future. In February 2020, the company announced that it would abandon any plans to pursue a break-up into two businesses. It also announced a restructuring plan that would cut 2,900 jobs (out of a total workforce of 88,000). As part of the restructuring, it also closed several plants.

In October 2020, the company completed the acquisition of Open Systems International for $1.6 billion. Open Systems was a leading provider of operations technology software.

In November 2022, Emerson completed the sale of its InSinkErator food waste disposal business to Whirlpool (symbol WHR on New York) for $3.0 billion.

The InSinkErator sale was part of Emerson’s transformation into a leading global automation firm.

To further that transformation, in May 2023, Emerson completed the sale of 55% of its Climate Technologies. This business unit sells compressors and other HVAC products and services used in commercial and residential heating and cooling as well as cold storage. Emerson retained a 45% interest in the business.

In a separate transaction, in October 2023, Emerson completed its acquisition of National Instruments (symbol NI on Nasdaq) for $8.2 billion. National Instruments provides software-connected automated test and measurement systems that enable enterprises to bring products to market faster and at a lower cost. It has annual revenue of approximately $1.7 billion.

Emerson believes that combining National Instruments’ electronic test and measurement products and software with its own automation technology and software provides a much stronger set of offerings for customers in various end markets.

Meanwhile, on June 6, 2024, Emerson announced that it would sell its 40% interest in the Copeland joint venture for $3.4 billion.

In the three months ended December 31, 2024, Emerson’s revenue increased by 1.4% to $4.18 billion from $4.12 billion a year earlier. Excluding one-time items, the company earned $1.38 a share, in the quarter. That was up 13.1% from $1.22.

Going forward, the sale of the Copeland joint venture will help Emerson focus on its core businesses and strengthen its position as a global leader in automation.

All in all, the company’s long-term outlook is sound, although connected to the global economy. The shares yield 1.8%.

Recommendation in Pat’s Inner Circle: Emerson Electric Co. is okay to hold.

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