Should You Buy EMR Stock on the Dip?

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Emerson Electric Co. (NYSE:EMR) showed slight improvement in its first-quarter earnings report, but whether EMR stock can rebound from a less-than-stellar year remains to be seen. Analysts have downgraded the company’s price targets, and even CEO David Farr has stated that EMR is feeling the results of a shaky oil market.

Emerson Electric 185I think investors should just avoid EMR stock for now. Here are a few reasons why:

Poor Performance, Poor Value: Consider that over the past year, EMR stock has declined 13.5%, whereas industry mates like Honeywell International Inc. (NYSE:HON) and Johnson Controls Inc (NYSE:JCI) are up 12% and 5%, respectively, and the broader market has improved 15%. Despite this, EMR is no value — EMR trades at 14 times next year’s expected earnings, which is just better than HON’s 15 and more expensive than JCI’s 12. Moreover, the broader industry is trading for slightly cheaper at 13.5 times earnings. EMR’s also expensive when factoring in potential growth; EMR’s price/earnings-to-growth ratio is 1.8 (anything above 1 is considered overvalued).

An Unstable Oil Market: When most people think of Emerson, they think of the electronics maker, but this isn’t the same company as the one that makes portable radios. In fact, Emerson derives a great deal of its profits from industrial automation (plainly speaking, heavy machinery). Heavy machinery typically requires oil, and thus some analysts believe the depressed oil market could hit manufacturers like Emerson. According to Reuters, “The concern for these manufacturers is that oil and gas customers will reduce their capital spending because of fears of a lack of return with energy prices low.”

Market Woes in China: Though EMR’s latest quarterly report showed modest growth in China, China’s economy continues to experience growing pains. In fact, growth in China last year slowed to 7.4%, a level not seen in over two decades. China doesn’t make up an enormous part of EMR’s business, but Emerson still did about 13% of its business in China in 2013, so a Chinese slowdown is something for EMR stock holders to watch.

Price Targets Downgraded: The analyst community isn’t getting much positivity from Emerson’s tea leaves. Analysts at Nomura gave the EMR stock a “buy” rating but downgraded its price target from $74 to $67. Analysts at Robert W. Baird downgraded the stock from “outperform” to “neutral,” lowering its price target from $74 to $65. And analysts at Bank of America downgraded the stock from “neutral” to “underperform,” dropping its price target from $66 to $62.

Bottom Line

Yes, EMR is a Dividend Aristocrat, having improved its payout every year for the past 58 years. And as analysts have noted, Emerson did post modest gains for Q1 2015.

However, even a 3.3% yield isn’t making up for the weakness in EMR stock, and those financial results were set against the backdrop of lowered targets and an oil market that’s still teetering.

For now, investors are better off looking for better places for their money than Emerson.

As of this writing, Will Emerson did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2015/02/emerson-stock-emr-stock-emr/.

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