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Emerson (EMR) Gains From End-Market Strength, Risks Persist

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On May 10, we issued an updated research report on Emerson Electric Co. (EMR - Free Report) .

In the past three months, this Zacks Rank #3 (Hold) stock has returned 11.8% compared with the industry’s growth of 3.2%.

Existing Business Scenario

Emerson has been benefiting from strength across its medical, life science, semiconductor, food and beverage, cold chain and residential end markets. Also, recovery in automation end markets, along with robust backlog level at its Automation Solutions segment, is likely to support its performance. For fiscal 2021 (ending Sep 30, 2021), the company expects net sales growth of 6-9% on a year-over-year basis.

Also, the company’s acquired business of Intelligent Platforms (acquired from General Electric Company in February 2019) has expanded its opportunities across process and discrete industries as well as hybrid markets like metals and mining, food and beverage, life sciences, and packaging. Moreover, the American Governor buyout (closed in April 2020) has been strengthening its offerings for its power customers. In addition, its acquisition of 7AC Technologies (November 2020) will enable Emerson to boost its offerings within heating, ventilation and air conditioning space.

Further, strong cash flow position adds to the company’s strength. In fiscal 2020 (ended Sep 30, 2020) and the first half of fiscal 2021, Emerson generated net cash of $3,083 million and $1,615 million from operating activities, respectively, marking growth of 2.6% and 59.6% from their respective year-ago figures. For fiscal 2021 it anticipates operating cash flow of $3.3 billion and free cash flow of $2.7 billion.

However, it has been dealing with rising costs and expenses. In the second-quarter fiscal 2021 (ended Mar 31, 2021), its cost of sales and selling, general & administrative costs jumped 6.5% and 7.2%, respectively. Further, the company’s high debt level is a major concern. For instance, it had a long-term debt of $5,823 million exiting the fiscal second quarter, up 47% on a year-over-year basis.

Key Picks

Some better-ranked stocks from the same space are A. O. Smith Corporation (AOS - Free Report) , Eaton Corporation, plc (ETN - Free Report) and AZZ Inc. (AZZ - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A. O. Smith delivered a positive earnings surprise of 14.84%, on average, in the trailing four quarters.

Eaton delivered a positive earnings surprise of 16.78%, on average, in the trailing four quarters.

AZZ delivered an earnings surprise of 5.08% in the last reported quarter.

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