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Emerson (EMR) to Gain From End-Market Strength Amid Risks

Emerson Electric Co. EMR stands to benefit from strength across its food and beverage, cold chain, residential heating, ventilation and air conditioning end markets in the quarters ahead. Improvement in discrete, hybrid and process automation end markets is likely to drive its performance, going forward. Also, the company’s robust backlog level at both its Automation Solutions and Commercial & Residential Solutions segments is likely to support its top-line performance in the coming quarters.

The company’s acquisition of Mita-Teknik (December 2021) is likely to expand its presence in the renewable energy market. It acquired Progea Group and Open Systems International in the first quarter of fiscal 2021 (ended December 2020). While the Progea acquisition has been enhancing the company’s offerings within control and embedded software space, the Open Systems buyout has been enhancing its offerings under the Automation Solutions segment. The 7AC Technologies buyout (November 2020) has augmented its offerings in heating, ventilation and air conditioning space.

Its ability to generate solid cash flows allows it to reward shareholders apart from making acquisitions. In fiscal 2021 (ended September 2021), its free cash flow grew 18% year over year to $2,994 million. For fiscal 2022 (ending September 2022), it anticipates free cash flow of $3.1 billion. Also, in fiscal 2021, the company paid dividends worth $1,210 million and repurchased shares worth $500 million. In November 2021, the quarterly dividend rate was hiked by 2%.

However, the company has been witnessing escalating costs and expenses. In the fourth-quarter fiscal 2021, its cost of sales increased 10.3% year over year, while selling, general & administrative costs rose 11.4%. High restructuring expenses might also affect its margins and profitability. For fiscal 2022, it expects restructuring expenses of $150 million. Also, challenges related to supply-chain, labor, raw material costs and logistics might weigh on its performance in the quarters ahead.

Its high-debt profile also poses a concern. Exiting fiscal 2021, its long-term debt was high at $5,793 million. Further, an increase in debt levels can raise the company’s financial obligations.

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The Zacks Rank #3 (Hold) company’s shares have gained 3.9% compared with 7.8% growth recorded by the industry in the past six months.

Key Picks

Some better-ranked companies from the same space are discussed below.

AZZ Inc. AZZ presently carries a Zacks Rank #2 (Buy). Its earnings surprise in the last four quarters was 16.90%, on average. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

AZZ’s earnings estimates have increased 2.3% for fiscal 2022 (ending February 2022) and 3.7% for fiscal 2023 (ending February 2023) in the past 30 days. Its shares have gained 0.4% in the past six months.

Franklin Electric Co., Inc. FELE presently carries a Zacks Rank #2. Its earnings surprise in the last four quarters was 16.27%, on average.

Franklin Electric’s earnings estimates have been stable for 2021 (results not yet released) and increased 0.6% for 2022 in the past 30 days. FELE’s shares have gained 14.5% in the past six months.

Zurn Water Solutions Corporation ZWS presently carries a Zacks Rank #2. Its average earnings surprise in the last four quarters was 33.09%.

Zurn’s earnings estimates have been unchanged for 2021 (results not yet released) and decreased 0.9% for 2022 in the past 30 days. ZWS’ shares have lost 32.6% in the past six months.

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Emerson Electric Co. (EMR): Free Stock Analysis Report
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Zurn Water Solutions Corporation (ZWS): Free Stock Analysis Report
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