Over the past six months, Emerson Electric has been a great trade, beating the S&P 500 by 7.5%. Its stock price has climbed to $144.50, representing a healthy 11.6% increase. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy Emerson Electric, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Is Emerson Electric Not Exciting?

Despite the momentum, we're cautious about Emerson Electric. Here are three reasons why there are better opportunities than EMR and a stock we'd rather own.

1. Long-Term Revenue Growth Flatter Than a Pancake

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Unfortunately, Emerson Electric struggled to consistently increase demand as its $17.61 billion of sales for the trailing 12 months was close to its revenue five years ago. This wasn’t a great result and is a sign of lacking business quality.

2. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, Emerson Electric’s margin dropped by 4.1 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity. Emerson Electric’s free cash flow margin for the trailing 12 months was 14.3%.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Emerson Electric’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Emerson Electric isn’t a terrible business, but it doesn’t pass our quality test. With its shares topping the market in recent months, the stock trades at 23.4× forward P/E (or $144.50 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. We’d suggest looking at the most entrenched endpoint security platform on the market.

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