Wednesday, November 5, 2008

* Stock Analysis: Emerson Electric Co (EMR)

Linked here is a PDF copy of my detailed analysis of Emerson Electric Co (EMR). Below are some highlights from the above linked analysis:

Company Description: Emerson Electric Co. primarily makes backup power equipment for telecom and Internet providers and users, climate control components, and electric motors.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number
EMR is trading at a discount to 1.) and 3.) above. If I exclude the high and low valuations and average the remaining two, EMR is trading at a slight premium. EMR earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
  1. Rolling 4-yr Div. > 15%
  2. Dividend Growth Rate
  3. Years of Div. Growth
  4. 1-Yr. > 5-Yr Growth
  5. Payout 15% of avg.
EMR earned two Stars in this section for 3.) and 4.) above. EMR has paid a cash dividend to shareholders every year since 1947 and has increased its dividend payments for 51 consecutive years. It's one year dividend growth rate exceeded its 5-year growth rate. This could indicate the growth rate is accelerating.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
  1. NPV MMA Diff.
  2. Years to >MMA
EMR earned no Stars in this section. The NPV MMA Diff. of the $2,043 is below the $2,500 minimum I look for in a stock that has increased dividends as long as EMR has. If EMR grows its dividend at 5.9% per year, it will take 8 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%.

Other: EMR is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. Several of EMR's major end-markets are highly cyclical, but it is in a strong competitive position in most major product categories. EMR's business outlook over the next two years appear strong. The company should see continued organic revenue growth from international sales, new product introductions and bolt-on acquisitions. EMR's business efficiency and operating metrics should improve, further strengthening its free cash flow growth. Risks include weak global economic growth and potential value-diminishing acquisitions.

Conclusion: EMR earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a net total of three Stars. This quantitatively ranks EMR as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price would need to drop to $30.36 for EMR's NPV MMA Diff. to be around the $3,000 that I like to see. At that price EMR would yield 3.95%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the $3,000 NPV MMA Differential I'm looking for, the calculated rate is 6.8%. This dividend growth rate is above the 5.9% used in this analysis.

Like its rating of 3 Stars, I am lukewarm on adding EMR to my income portfolio. Given the stocks cyclical nature of the stock, I would require a higher NPV MMA Differential of $5,000, which would lower the buy below price to $26.91.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in EMR (0.0% of my Income Portfolio) .

What are your thoughts on EMR?

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