US Manufacturer Plays the Global Game

08/12/2009 11:14 am EST


George Putnam

Editor, The Turnaround Letter

George Putnam III, editor of The Turnaround Letter, says century-old Emerson Electric makes a wide range of products and adapts nimbly to global markets.

Emerson Electric (NYSE: EMR) was founded in the late 19th century as a manufacturer of AC motors. After introducing the first electric fans to be sold in the US, the company went on to sewing and washing machines as well as power tools.

The company has evolved over the last 120 years to become one of the largest conglomerates in the US, with some 140,000 employees and operations spanning 150 countries.

Emerson, as a maker of a wide range of electrical and electromechanical products, has seen its markets soften significantly in the current global recession. As a result, its stock, which peaked in late 2007 near $60, dropped to the mid-$20s before recovering somewhat in the recent market rally.

While Emerson’s short-term prospects depend on the vagaries of the global economy, the company has a history of innovation, as well as manufacturing and marketing strength, that bodes well for the longer term.

The company’s brands are well-known and well-respected around the globe, and management is considered by many analysts to be best in class. Sales of new product introductions have nearly doubled since 2003 and resulted in Emerson’s capturing leading positions in a number of markets.

For example, the company is a leader in applying wireless technology to process environments (such as being able to detect leaks along pipelines), and it is the first US-based manufacturer to supply the Chinese market with specialized power converters for large wind turbines.

With sales outside the US now accounting for more than half of total revenues, Emerson is well positioned to grow even if the US economy continues to sputter for some time. Moreover, it has a significant and expanding position in a number of the emerging markets that will provide the lion’s share of global economic growth.

The company has a well-deserved reputation for financial strength. Operations threw off $2.6 billion in free cash flow in 2008, and despite expectations of ongoing retrenchment, management is looking for a further $2.6 billion this year. This positions the company to gain market share as weaker competitors struggle.

Emerson is also known for being generous to its shareholders. Over the years it has used a significant percentage of its free cash flow to pay dividends and buy back stock. The company has raised its dividend for 52 consecutive years, and the stock currently yields a relatively munificent 3.7%.

We believe that the current global downturn gives investors the chance to buy a pre-eminent global manufacturer at a beaten-down price. Some patience may be required before Emerson fully rebounds, but the dividend compensates you while you wait. We recommend buying Emerson up to $48. (It closed at around $36 Tuesday—Editor.)

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