The core business at Emerson Electric (EMR) remains in the throes of a weak period for Process and Industrial Automation. As a result, the company has lowered guidance again to reflect the current realities of the business. Emerson now expects sales to decline 9%-10% in 2016.
The company is mired in competitive currency market share shifts, while other smaller players nip at the heels of this global behemoth. Oil and gas and core industrial markets, obviously, remain weak.
In response, there is an underlying reallocation of the portfolio to redesign Emerson for future growth. This morning, the company announced the sale of its electric motor, drives and power business to Japanese company Nidec. And in a "two-fer," the company announced the $4 billion sale of the Network Power segment to Platinum Equity. In total, $5 billion-plus to Emerson.
Six of one, and half a dozen of another: A leaner, meaner Emerson, led by the smart and aggressive David Farr, now has more even more fire power to pursue strategic acquisitions in Automation and Commercial & Industrial. There would probably be more reasonably priced deals in C&I. In Automation, valuation multiples have increased, especially if the company would like to expand into markets such as medical or technology, where growth is on a different cycle than the core oil/gas/industrial markets where Emerson dominates.
I wonder if there is one big deal that Emerson can make that can change the dynamic of the portfolio. There are assets out there. We'll probably see a group of smaller deals, though, as they bolt-on strategic growth.
Restructuring continues, and margins are holding up reasonably well, despite this weaker revenue environment. Aside from the usual continuous fixed and variable cost management tools inherent in many industrial companies, I'm not sure there is a lot more the Emerson can take out at this point. We have to wait for the top line to recover for margins to expand materially from here.
We can get paid while we wait, as shares of EMR are currently yielding 3.5%. Farr and the gang just added an element of optionality with the announced sales this morning, too. So long-term, we can imagine a slightly different, and perhaps "growthier" Emerson Electric.
Could be worse.
