A Blue Chip That Should Motor Forward

04/15/2008 12:00 am EST

Focus: STOCKS

Jon Markman

Editor, Trader's Advantage

Jon Markman, editor of Strategic Advantage, says longtime blue-chip winner Emerson Electric should continue to show strong sales and revenue growth in the years ahead.

[One of our recent leaders] is industrial conglomerate Emerson Electric (NYSE: EMR), which is remarkably little known considering that it has a market capitalization of $42 billion and employs 140,000 people at 256 factories on six continents.

It may be convenient to think of EMR as a smaller version of General Electric (NYSE: GE), especially [since] the two companies were founded around the same time. While Thomas Edison was busy with this crazy invention known as the incandescent light bulb, the folks at EMR were busy commercializing their own wacky innovation, the electric fan.

The fan's role in history is a bit underappreciated. But without it, you couldn't have had many follow-on innovations, such as the air conditioner. As its fans made the company a fortune in the go-go 1920s, EMR began developing smaller electric motors for everything from the first sewing machines to the first dental drills. The company's motors have evolved to revolutionize the tools that we use and the way they are manufactured.

Today, EMR operates out of five divisions, with about half of its $23 billion in sales coming from two divisions that focus on improving production efficiency. The Process Management unit offers products and engineering services to improve efficiency. The second division is the company's Industrial Automation, which provides the motors, transmissions, alternators, and fluid controls that make production lines work.

Another 20% of sales come from the company's Network Power segment, which makes and manages chips and grids for electrical power applications large and small. The unit's backup systems, precision cooling systems, embedded and inbound power supplies have seen sales increase 18% in the last year, and growth is expected to advance most briskly in emerging markets.

The remaining 35% of EMR's revenues are split between its Climate Technologies unit, which includes residential and commercial heating and air conditioning, and its Appliances and Tools division. You may recognize the Emerson label on many tools around your house.

Emerson has a consistent record of earnings growth and strong projections through the next two years. In recent first-quarter results, earnings from continuing operations were up 17%, and earnings per share were up 20% over the same period in 2006. The company has posted sales growth of over 15% in the last two years, and its earnings have grown by the same amount over the past five years on average.

We expect earnings to keep the same pace this year, with EPS increasing to $2.95 to $3.05 per share from the $2.66 that was reported for 2007. [At a recent close above $50,] the shares are pretty cheap, trading at around 15x 2009 [projected] earnings.

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