Welcome back to the remainder of this workshop.

Karen O'Boyle suggested that we take a look at the RA for Emerson Electric (EMR).  So, the first thing that I did was print out a copy of the report.  So ... let's first do a digression and discuss printing the RA report.

Printing

When you are on the Ratio Analyzer page, there is a "Print This Page" link in the left column.  This is a great litlle link, but it needs to be set up first, and that depends on your browser.

Before clicking "Print This Page" for the first time, instead use your browser's Print Preview function. 

If you are using Internet Explorer, click on the printer icon and then Print Preview.  Next, use the drop down list to select a size so that the RA report occupies two pages.  For me, selecting 95% works just fine.

If you use Firefox, then you select Print and then Print Preview.  Choose a zoom factor that fits. In my case, that's 90%.

After choosing a zoom factor, you can the click the "Print This Page" link with impunity ... unless you reconfigure your printer.  If you always want to be safe, use the Print Preview function.

EMR

My first impression of the EMR report from the Ratio Analyzer is that there is a lot of orange and red (I've attached a PDF printout of the RA report to this message).  So, because I've never analyzed Emerson Electric, I'm interested to see what attracts Karen's attention.

Under the Liquidity heading I notice that, while EMR's debt seems to be high, that they can cover the interest payments easily, and that the long term debt is decreasing.

Under Efficiency, there are other cautions related primarily to Accounts Receivable which are growing faster than sales.  Inventories are growing only slightly.

In the Cashflow Ratios section, the free cash flow and related quantities are negative!

Under Profitability, the Cost of Sales is growing, but in line with the growth in Sales.  The Gross Profit Margin is less than 50%.  I would next check to see if this is "normal" by looking back in time 1, 5 or 10 years.  Looking back I see that this situation hasn't changed for 5 years.

The Asset and Inventory situation seems to be under control.

So ... at this point, it would seem that there are some areas of Emerson's financials that merit further analysis.  Karen, what's your take?

And, for a sanity check, I took a loot at Take Stock.  Take Stock isn't impressed with Emerson's quality, and this seems to be related to both the level and the unpredictability of Emerson's sales and earnings.

Does someone have an SSG for Emerson that you'd be willing to share?

I can't figure out how to upload the SSG.   Help!

Karen

Never mind - I guess the upload worked.

Thanks, Karen.

"And, for a sanity check, I took a look at Take Stock.  Take Stock isn't impressed with Emerson's quality, and this seems to be related to both the level and the unpredictability of Emerson's sales and earnings."

Sales and earnings are what I would consider stable. When I look at the chart I see it dropped in 2001 which was a recessionary market and the turmoil going on then. Since 2003 they have been on a steady uptrend. I used 5% for my growth going forward. I try to stay in the large sales cap 5-7% range when estimating growth. At present it is a hold with a 2/1 UD.

Ok I'll make another try at this - There is a lot of orange & red as Joe pointed out - and each of the items warrants a closer look.  This is where the 'other 20%" comes in.   

EMR's debt ratio does seem to be high based on the 30% or so recommendation of TK5.  EMR is an industrial company that manufactures & sells a range of electrical products and systmes wold wide.  Then looking at EMR compared to the industy, the debt ratio seems in-line (actually on the low end).  See the attachment from MStar for the competitors.  It seem that companies within this industry all experience higher debt ratios with EMR being in the lower third (good) of the companies compared.  Also, as Joe mentioned with 14X interest coverage they can cover the interest on debt easily.

To Be Continued on next post.

Another flag is Accounts Receivable growing faster than sales.  An analyst questioned this number during the conference call and EMR said the higher number is because of greater growth in the int'l business.  Organic growth for the U.S. was 5% while the int'l growth was 9% and went on to say that int'l businesses carry higher receivables.  They don't see any collection or other issues going on - just the slowing of the business in the U.S.  Also they mentioned they picked up 5 points of growth because of the currency difference and that hurt receivables.

More in the next post - as these can't be too long or they will not transmit.

Karen

I guess I would say that the trend has been good starting with the 2003 fiscal year.  If I drop all of the data before then, the historical sales growth rate is 13% and the EPS growth rate is 22%.  Seems to be a bit slower from 2006 to 2007.

The recent quarterly growth rates are 12.6% and 19%.  The last year is compatible with those numbers.

The PERT-A graph indicates that the TTM growth rates may have bottomed.

In my SSG I'll use 13% and 15% as the projected growth rates.  The single quarter from the last annual data is compatible with that. I'll note that the default parameter for the Preferred Procedure with a 13% sales growth rate is 10-11%, so I'd really like to know how EMR is growing sales in excess of 22%.

With 20 and 15 as the high and low PEs, and choosing $30 as the potential low, I get  and U/D of about 2.5 and the top of the buy zone at about $50 share.

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I'm willing to discount Take Stock's worries about what happened more than 5 years in the past, but ... if we're really in rececessionary times again ...

In the cash flow section there are a couple of warning signs.  I think cash flow is the gold standard for measuring the profitability of a company, so I do pay close attention here.  Again on the conference call EMR said that operating cash flow is in the #3.2B range for the first qtr. (fiscal yr. ends Sept) and that 55 -60 percent of that will go back to the shareholders in the form of dividend and share repurchases.  MStar reports that EMR does in fact return 60% of FCF to shareholders amounting to $1.7B.  Now thats shareholder friendly.    Also, EMR acquired Artesyn for $580M in cash in late 2006.

Gross Margins have been running from 34 to 36% since 1998 and are higher than the other competitors in the industry as listed by MStar.

More to follow

Ok this is the last one, I promise.

On Feb 14th Barrons ran an article 'Shocking Buy at Emerson Electric" and reported that on Feb 5th a member of the EMR board purchased 42,000 shares of the companies stock for $2.1M.   (Makes my palty little purchase seem insignificant)

In 2007 EMR was awarded the primary process automation contract for BP Int'l three largest U.S. refineries.

Using the Ratio Analyzer caused me to look at some of the metrics of the company that I would not otherwise have focused.  It is a great tool and I give a shout out to all who developed this!

I think EMR is a company that warrants a closer look by long term investors.   What do others think?

Thanks, Joe for the workshop, it was excellent and I hope we'll see more stock studies of this type.

Karen

I said the last one would be final, but I do want to respond to the posts by Danny & Joe.

I used 13% for the eps growth rate as that is what the company says they will attain.  EMR emphatically states that it strongly supports lon-term shareholder value creation and has an excellent track record of backing up this claim.  EMR expensed options before it became the GAAP rule to do so.  This is the kind of management I like to see in a company.

Karen

Great point Karen, thye have a defined dividend policy and if they can keep on doing what they have done over the past, 13% seems very well within range. I also like to look at how companies come back from recessionary or down markets. EMR passes that test

Discolsure, I own EMR

Karen,

My Club and then I, have owned EMR for several years.  I've been happy with the results.  Often I have undervalued the company but it continues to do well.  The webcasts are upbeat and positive.  I'm impressed with their international expansion especially into China.

Bob