The pandemic taught an excellent lesson for business leaders to prioritize supply chain investments. Yet, as companies tap Emerson Electric (EMR) to provide supply chain solutions, investors don’t see the power of the business. With its as-reported metrics making the business look average, today’s FA Alpha will showcase the company’s true returns.
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Thursday Uniform accounting analysis
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If the past two years have taught companies anything, it is the importance of a watertight supply chain. The COVID-19 pandemic showed that no one is immune to supply chain deficiencies.
If you are unable to access materials and unable to get final products into the hands of your customer, it is near impossible for your business to succeed. In 2020 alone, over $3 trillion in revenue was lost globally due to supply chain deficiencies.
Because of this, companies will spend 2022 investing heavily into their supply chains. They are hoping that by making deliveries “just in time” once again, they will be able to avoid another catastrophe.
In the past year alone, an estimated 83% of organizations have increased their investments into their supply chain.
This means that there is an opportunity for companies out there to capitalize on this realized need to maximize efficiency and productivity.
Companies looking to improve their supply chain could soon be turning to Emerson Electric (EMR) to provide these exact solutions.
Emerson specializes in solutions for companies in industrial, commercial, and consumer markets.
Companies without expertise in supply chain management can leverage Emerson Electric’s products. The company’s biggest business by far is in making valves, process control software, and instrumental measurement systems which act as the lifeblood of the manufacturing world.
Even though Emerson will be a popular name for corporations in the coming years, investors might not be too excited about its prospects.
This is because too many investors are taking as-reported metrics at face value. When looking at the company’s return on assets (ROA) in the past 10 years we can see that as-reported ROA hovered between 7%-11%. This is just below the corporate average of 12%.
When given this information someone can hardly be faulted for thinking Emerson is unspectacular.
So why do we think Emerson is an interesting company?
The answer lies in Uniform Accounting.
When we use Uniform Accounting to look at Emerson an entirely different story unfolds.
The reality is that Emerson has been an incredibly efficient operator, with an ROA well above the corporate average over the past decade. And since 2018 the company has been even more impressive, with an ROA consistently above 21%.
With the help of Uniform Accounting we are able to see that Emerson is much more profitable than GAAP metrics might suggest.
The company has a long history of impressive returns. And due to the realized importance of companies like Emerson, their return on assets are expected to improve.
Without the help of Uniform Accounting, Emerson would look like a below average company in a cutthroat industry. But Emerson is in fact far above average, and Uniform Accounting shows us the real picture that we should be seeing.
SUMMARY and Emerson Electric Co. Tearsheet
As the Uniform Accounting tearsheet for Emerson Electric highlights, its Uniform P/E trades at 16.0x, which is below the global corporate average of 19.7x and its historical average of 17.9x.
Low P/Es require low EPS growth to sustain them. That said, in the case of Emerson Electric, the company has recently shown 12% Uniform EPS growth.
Wall Street analysts provide stock and valuation recommendations that, in general, provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.
We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Emerson Electric’s Wall Street analyst-driven forecast is for EPS to grow by 21% in 2022 and 2% in 2023.
Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Emerson Electric’s $81 stock price. These are often referred to as market embedded expectations.
The company is currently being valued as if Uniform earnings were to shrink by 2% annually over the next three years. What Wall Street analysts expect for Emerson Electric’s earnings growth is above what the current stock market valuation requires through 2023.
Furthermore, the company’s earning power is 4x the long-run corporate average. Also, cash flows and cash on hand are 3x the total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals a low credit and dividend risk.
Lastly, Emerson Electric’s Uniform earnings growth is above peer averages and is aso trading above average peer valuations.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research
The Uniform Accounting insights in today’s issue are the same ones that power some of our best stock picks and macro research, which can be found in our FA Alpha Daily newsletters.