Emerson Electric (NYSE:EMR) — a provider of industrial process control services and appliances such as electric motors and water valves — reported strong earnings growth Tuesday. Should this stock be in your portfolio?

Emerson’s third-quarter net income and sales were up — but they did not beat expectations. Specifically, Emerson Electric’s net income of $683 million was 17% above the previous year’s $585 million, and it met EPS expectations of 90 cents per share for the quarter.

Emerson’s net sales for the quarter rose 16% to $6.29 billion — $100 million less than 17 analysts’ consensus revenue estimate. Meanwhile, Emerson held onto its EPS forecast for the year of between $3.20 and $3.30 with sales growth in the range of 10% to 13%.

Is this strong earnings report enough of a reason to warrant an investment in Emerson stock?

Here are two reasons to consider it:

• Out-earning its cost of capital. Emerson is earning more than its cost of capital — and it’s improving. How so? It produced positive EVA momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first nine months of 2011, Emerson’s EVA momentum was 1%, based on first nine months’ 2010 annualized revenue of $20.2 billion, and EVA that rose from $787 million annualizing the first nine months of 2010 to $960 million annualizing the first nine months of 2011, using a 10% weighted average cost of capital.
• Decent dividend. Emerson’s dividend yield is 2.81%.

There are three reasons to consider avoiding Emerson:

• Slow growth and somewhat shaky balance sheet. Emerson has been growing slowly. Its $21 billion in revenues have increased at an average rate of 1.6% over the past five years, and its net income of $2 billion has risen at a 2.1% annual rate during that period — yielding a 9.9% net profit margin. Its debt has grown quickly but its cash is rising even more rapidly. Emerson’s debt climbed at 10.4% annual rate, from $3.1 billion (2006) to $4.6 billion (2010), while its cash rose at an 18.6% annual rate, from $810 million to $1.6 billion.
• Mixed earnings reports. Emerson has missed analysts’ expectations in three of the past five earnings reports and beaten expectations in two of them.
• Somewhat high valuation. Emerson’s price/earnings-to-growth ratio of 1.15 (where a PEG of 1.0 is considered fairly priced) means it is slightly overvalued. It currently has a P/E of 21 and is expected to grow 18.2% to $3.87 in fiscal 2012.

My conclusion is that this stock needs a catalyst, and it does not seem to have one. I would avoid it for now.

Peter Cohan has no financial interest in the securities mentioned.