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Emerson Still Electric Even Though Earnings Aren't

Posted: May 11, 2009 11:47 AM by Greg Sushinsky

Tickers in this Article: PH, CNH, ABB, DHR, UTX, EMR

On May 5, Emerson Electric (NYSE: EMR) reported second-quarter earnings of 53 cents a share (excluding restructuring charges), which was down from 69 cents a year ago, while revenue declined 16% to $5.09 billion. To explain the decline, the maker of wireless systems used in heavy industrial operations cited the global lack of demand and the company's restructuring. Although the company reaffirmed earnings guidance for the rest of the year, which includes a predicted 13-15% decline in sales, observers say that these earnings might be tough to reach. The company, however, is still a strong industrial conglomerate and should remain so, despite the recession.

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Heavy Industry Still Sluggish
Most of the heavy industries, such as oil refining, aerospace, power and construction, are still working through the slowdown and lacking demand of the last 18 months. Though Emerson is still profitable, this slowdown has affected the company and many others in the sector.

United Technologies (NYSE: UTX) recently reported a 28% drop in first-quarter profit, though it noted the slowdown in most of its businesses had stabilized by mid-March. The company maintained it would resume profit growth in the next year. United Tech, with its huge and diversified industrial footprint, ranging from construction to military helicopters, can be seen as an indicator of overall industrial business activity. So, while United Tech's results are in line with many of its competitors, watch for any upturn in its business as we go through the year.

Danaher and ABB Have Upside Potential
One company which has had a noteworthy relative performance is widely diversified conglomerate Danaher (NYSE: DHR). Because of its subsidiaries, Danaher is involved in a number of industries, from medical/dental equipment to postal scanners. The company's revenue was off 13% - less than most of the conglomerates in the industry- and its income was also down. The company's cash flow only declined by 5%, less than other conglomerates. So, with this relatively good performance in mind, look for Danaher to emerge rapidly into even more positive territory once the economy turns. Though not as well known as the big name conglomerates, this is a solid company.

ABB (NYSE:ABB), the Swiss electric giant, has done a major turnaround since 2002, when it was in deep trouble, and now generates plenty of cash along with electric grid components. Its forward looking CEO Joseph Hogan, formerly of General Electric (NYSE: GE), has made the fiscal moves as well as business moves to position ABB as a nimble, vital player in the power industry.

Good Positioning
Part of the success of these conglomerates is where they are positioned in heavy industries, and their amount of diversification. CNH Global (NYSE: CNH), a Dutch heavy agricultural equipment maker, has had a rougher time, as the continuing agricultural downturn is dampening its prospects.

The adverse business conditions has also affected small players like Parker-Hannifin (NYSE: PH), which is in motion and fluid controls in the industrial, aerospace and climate control areas, all with global exposure. Parker-Hannifin saw a 26.3% drop in revenue along with a 77.8% decline in earnings, which includes special charges. To keep perspective on Parker-Hannifin, it was still cited as an excellent company with a good long-term earnings history, and a stock which has the potential to outperform others in the long term. So the key for Parker-Hannifin, as the other conglomerates, is working through these hard times to be positioned to ramp up activity when business conditions will allow.

Emerson Electric for the Future?
Emerson has increased its dividend for 52 consecutive years, so this is a company that comes to mind when one talks about long-term investing, or even the supposedly discredited buy and hold investing. Still, Emerson Electric's quarterly numbers, while they don't shine, are part of an ongoing larger, longer story of strong earnings and a solid foot in the global industrial scheme of things.

The stock is attractively priced right now at around $36 a share, still off 38% from its 52-week high of $58. It trades at roughly 12-times earnings and pays a dividend which yields 3.72% (as of May 7, 2009), while you wait for future price appreciation. Check the business conditions as they improve slightly, then you might want to start buying some shares of Emerson as an investment for the future. (Take a look at our related article Is Your Dividend At Risk? to learn about factors that can affect your dividends.)

By Greg Sushinsky

Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.

Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.

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