Stability or Growth – This Industry has Both: Emerson Electric Co. (EMR)

Earnings Analysis: Emerson Electric Co. (NYSE:EMR)Investors in Emerson Electric Co. (NYSE:EMR) have a reason to smile as its fiscal 2013 took off with solid first quarter results. Fiscal 2012 was modest, but the company’s high exposure in promising markets like China can help it recover and grow this year.

Number churning

Emerson reported revenue of $5.55 billion, compared to $5.31 billion in the same period last year, slightly better than analyst estimates of $5.43 billion. EPS has grown a whopping 24% to $0.62 because of improved net income and a reduced number of shares.

Emerson’s cash flow has improved drastically, with operating cash flow increasing 66% QoQ to $554 million. Moreover, free cash flow grew 115% to $439 million. The company’s improved cash position makes it more flexible, as it can finance its capital investments. Furthermore, more cash might eventually flow towards investors by way of dividends and share repurchases.

The possibilities

The company’s climate business is improving and it can derive some benefit from it, but the biggest driver for growth is its automation business. The company should be selling automation products aggressively, especially in the emerging markets, and as labor costs rocket these capital expenditure will become more viable in the long-run.

Emerson’s management is positive on China’s growing industrialization, as it should eventually increase the manufacturing requirements in the country. Its expertise in factory automation systems should boost the company’s revenue once production is in full swing. Once the rest of the economy gets better the top line should improve further. Moreover, Emerson’s uninterruptable power supplies for data networks are constantly growing in the US and in South America, two markets with a lot of growth potential.

Improved energy exploration and development, increased demand for power, and construction of new refineries in China and India can grow the company’s energy management business revenue by more than 5% in the long-run.

Competitors

ABB Ltd (ADR) (NYSE:ABB) has performed well, and its stock price has appreciated over the last year. The company has a strong balance sheet, and with its strategic acquisitions in the last two years it is better placed than ever. Synergies from acquisitions and better product offerings help the company to create value for its investors.

The company’s Power Products division is very stable in terms of profitability, as it gets various tariffs and quotas on Korean transformers, helping it improve pricing supremacy in the U.S. ABB’s Process Automation segment lately received a number of contracts with mining companies that should improve its bottom line.

ABB should thrive, as it is well-positioned to benefit from global markets as companies in emerging markets are trying to improve their infrastructures, and developed nations are trying to improve their efficiency.