Emerson Electric

What does the company do?

Emerson Electric is a diversified industrial company selling primarily electrical equipment into industrial and residential end markets. At the time of writing (Sep 2022), Emerson Electric pays a 2.8% dividend and has raised the dividend for 65 consecutive years. The company’s Automation Solutions segment, at roughly two thirds of the business, includes automation instrumentation and software used in a variety of applications such as fluid processing (energy, industrial gasses, hydrogen, LNG) and product manufacturing (pharmaceuticals, food and beverage, automotive). The other segment consists mainly of power tools, HVAC products, and other home appliances. The company’s automation expertise and narrow set of competitors has led to a sizable installed base of its equipment which generates a meaningful portion of replacement revenues and aftermarket service revenues. The position in Emerson Electric was initiated due to its leading position in end markets poised for strong demand growth, something which was not being adequately reflected in the share price. Organic revenue growth has historically been in the 4-6% range which should accelerate closer to 10% over the medium term due to the need for greater production of LNG, hydrogen, oil and gas, and other energy resources. The company’s robust internal decarbonisation targets have permeated its own product development, leveraging its process automation technology for clean energy end markets such as hydrogen, solar, and wind. We believe this should allow the company to become a winner in the energy transition and help to drive clean energy technology costs down, maintaining its leading position in process automation. Lastly, continuous operational improvement and the exit of low-quality businesses has led to structurally higher earnings power on top of its growing revenue base which we view to be sustainable over time.