Emerson Electric has been treading water for the past six months, recording a small return of 4.4% while holding steady at $140.01.
Is now the time to buy Emerson Electric, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Emerson Electric Not Exciting?
We're sitting this one out for now. Here are three reasons we avoid EMR and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Emerson Electric grew its sales at a sluggish 1.6% compounded annual growth rate. This fell short of our benchmarks.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Emerson Electric’s revenue to rise by 5.3%. This projection is underwhelming and suggests its products and services will see some demand headwinds.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Emerson Electric’s margin dropped by 3.2 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Emerson Electric’s free cash flow margin for the trailing 12 months was 12.8%.
Final Judgment
Emerson Electric isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 21.5× forward P/E (or $140.01 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of our top digital advertising picks.
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