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Emerson (EMR) to Gain From Strong End Markets Amid Risks

Emerson Electric Co. EMR has been benefiting from strength across its medical, life science, food and beverage, cold chain, residential and commercial end markets. Improvement in process automation end markets in North America and robust backlog level at its Automation Solutions segment — which was $5.5 billion exiting the third-quarter fiscal 2021 (ended June 2021) — is expected to support its top line in the quarters ahead.

Emerson’s acquisition of Open Systems International and Progea Group in the first quarter of fiscal 2021 (ended December 2020) has been strengthening its offerings under the Automation Solutions segment and control and embedded software space, respectively. The 7AC Technologies buyout (in first-quarter fiscal 2021) has also been augmenting its offerings in heating, ventilation, and air conditioning space. The company expects acquisitions to boost sales by 1% in fiscal 2021 (ending September 2021).

Emerson’s ability to generate strong cash flows enables it to effectively deploy capital for repurchasing shares and paying out dividends. For fiscal 2021, the company anticipates operating cash flow of $3.6 billion and free cash flow of $3 billion. In the first nine months of fiscal 2021, Emerson repurchased shares worth $268 million and paid dividends worth $909 million. In November 2020, it announced a hike of 2 cents in the annual dividend rate.

However, the company is witnessing escalating costs and expenses, over time. In the fiscal third quarter, its cost of sales and selling, general & administrative costs recorded an increase of 18.2% and 14.9%, respectively. Also, challenges related to supply-chain, labor, raw material costs, and logistics will weigh on its margins and profitability in the upcoming quarters.

Emerson’s high-debt profile also poses a concern. Its long-term debt balance was $5,835 million at the end of the fiscal third quarter, reflecting an increase of 0.2% on a sequential basis. Any further increase in debt levels can raise the company’s financial obligations.


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In the past six months, the Zacks Rank #3 (Hold) stock has jumped 6% compared with the industry’s growth of 2.8%.

Stocks to Consider

Some better-ranked stocks from the same space are SPX FLOW, Inc. FLOW, Eaton Corporation plc ETN, and Regal Beloit Corporation RBC. All these companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

SPX FLOW pulled off a trailing four-quarter earnings surprise of 48.16%, on average.

Eaton pulled off a trailing four-quarter earnings surprise of 10.87%, on average.

Regal Beloit pulled off a trailing four-quarter earnings surprise of 20.63%, on average.


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Emerson Electric Co. (EMR): Free Stock Analysis Report
 
Eaton Corporation, PLC (ETN): Free Stock Analysis Report
 
Regal Beloit Corporation (RBC): Free Stock Analysis Report
 
SPX FLOW, Inc. (FLOW): Free Stock Analysis Report
 
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