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Emerson (EMR) Displays Bright Prospects, Headwinds Persist

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On Sep 14, we issued an updated research report on Emerson Electric Co. (EMR - Free Report) .

In the past six months, this Zacks Rank #3 (Hold) stock has returned 44.6% compared with the industry’s growth of 47.9%.

Existing Business Scenario

Emerson has been experiencing strength across its several end markets like medical, life science, food and beverage, and power. Also, the company’s solid backlog level, which was $5.1 billion, exiting the third quarter of fiscal 2020 (ended Jun 30, 2020) at its Automation Solutions segment, is likely to support its revenues in the quarters ahead.

Also, Emerson’s acquisition of General Electric Company’s (GE - Free Report) Intelligent Platforms business (closed in February 2019) has expanded its opportunities across process and discrete industries as well as hybrid markets including metals and mining, food and beverage, life sciences, and packaging. Moreover, the American Governor buyout (closed in April 2020) is likely to boost its offerings for its power customers. In addition, the company’s agreement to acquire Open Systems International (inked in August 2020) will strengthen its offerings under the Automation Solutions segment.

Moreover, strong cash flow position adds to Emerson’s strength. For instance, in the first nine months of fiscal 2020, the company successfully generated net cash of $1,854 million from operating activities, reflecting growth of 2.9% from the year-ago period. For fiscal 2020 (ending Sep 30, 2020) it anticipates operating cash flow of $2.8 billion and free cash flow of $2.25 billion.

However, a low demand environment on account of the coronavirus outbreak-led weakness across most end markets, particularly the North American upstream oil and gas space remains concerning in the short run.  Notably, it anticipates overall demand to remain considerably weak in the quarters ahead. For fiscal 2020, Emerson anticipates an organic sales decline of 7.5-9% on a year-over-year basis against a 6% rise reported in the previous fiscal year.

Further, the company’s high debt level is a major concern. For instance, it had a long-term debt of $5,500 million exiting the third-quarter fiscal 2020, up 38.9% on a sequential basis.

Key Picks

A couple of better-ranked stocks from the same space are ABB Ltd (ABB - Free Report) and Enersys (ENS - Free Report) . Both these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ABB delivered a positive earnings surprise of 100.00%, in the last reported quarter.

Enersys delivered a positive earnings surprise of 5.20%, on average, in the trailing four quarters.

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Emerson Electric Co. (EMR) - free report >>

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General Electric Company (GE) - free report >>

Enersys (ENS) - free report >>

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