Emerson Electric Co.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Emerson Electric is a global technology and engineering company that provides innovative solutions for a wide range of industrial, commercial, and consumer markets by bringing together hardware, software, and analysis.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Emerson Electric, a company with over 130 years of history, operates in a variety of industries, making its moat assessment more complex than a company concentrated in fewer sectors.

Business Overview

Emerson Electric operates through two major business segments: Intelligent Devices and Software and Control.

Intelligent Devices:

  • This segment provides products for automated operations.
  • This is the core source of revenue.
  • Products include:
    • sensors,
    • control valves,
    • actuators,
    • and pneumatic equipment used to monitor and control diverse manufacturing processes.

Software and Control:

  • This segment provides software, control systems, and process optimization to improve customer operations.
  • The products include asset management, remote management and analytics.
  • It is a rapidly growing segment.
  • It’s helping companies to digitize their workflows and automate their operations.

The business is global, with a presence across the Americas, Europe, Asia, and the Middle East & Africa.

The company is attempting to move from just hardware to providing a more complete solution. Including software and consulting in its product offering.

  • Technological advancements: Industries are constantly changing, driven by automation, robotics, AI, and data analysis, as well as climate change and the push for sustainability. Companies that implement and improve their offerings in new areas will benefit.
  • Digitization: Companies across all industries increasingly use more software and cloud-based solutions to monitor, optimize, and improve their processes.
  • Sustainability and energy transition: Companies are focusing more on sustainability, and this is causing them to look at greener processes and products.

Financials Analysis

Revenue and Margins

  • Sales have been increasing in 2022 and 2023.
    • Full year 2023 sales were $16.9 billion, up from 14.9 billion from the previous year.
    • Net sales for the first three months of fiscal 2024 was $4.4 billion, up 17% compared with same quarter of the previous year.
  • Net margins were 16.2% and 15.9% in 2022 and 2023 respectively. For the first three months of 2024, net margin was 16.6%.
  • Adjusted EBITA margin in 2023 was 23.2%
    • And 23.4% for the first three months of 2024
  • The company had a loss on divestitures in the current fiscal year.
  • Gross profit margins were up a bit (45.7% in 2023 and 46.9% in the last quarter.)

The company has shown decent sales growth in 2023 and going into 2024. The margins are also improving slightly, and they are at respectable levels.

Balance Sheet Health

  • The company has shown a net increase in cash by around 800 million compared to same time last year.
  • They have also seen an increase in debt.
  • The debt to equity ratio increased from around 0.5 to 0.7 in 2023. This is still a good ratio, as generally it is better for debt not to exceed 1x equity.
  • They had approximately 1 billion in buybacks and dividends in 2023 and 2024.
  • They have a 1.2 times current ratio and 2.7 debt to equity ratio.

Overall, the balance sheet seems healthy as the debt is manageable, though it has increased recently.

Moat Assessment: 3/5

  • Intangible assets:
    • Emerson has a very long history in many sectors. This does add to its brand image, however, in the markets it mainly plays in, the brand might be of limited benefit.
    • The company has many patents and intellectual property which could add to a durable advantage. However, in most industries in which the company operates, these are not particularly difficult to overcome or work around.
    • The company has a strong reputation. This does enable it to sell at a premium as well.
  • Switching costs:
    • The company’s products are often integrated into complex systems that make it harder for customers to switch products. This acts like a switching cost, especially for the software part of the business.
  • Network effects:
    • While not a primary driver of moat, but having a large base of installed machines for its product base may create network effect opportunities for new customers.
  • Cost advantages:
    • The company has some scale advantage due to being a large enterprise. Also, some of the production facilities are situated in areas of cheap labor, reducing production costs.
    • They also have relationships with a wide network of suppliers from around the globe that can offer the best inputs at the lowest costs.

Although the company’s historical performance has been robust, the competitive landscape is extremely fluid, and new entrants or rapid technological advancements could threaten existing economic moats. Overall, I would rate their moat as a 3/5. It is a reasonably strong moat, but it can be broken, and needs to be watched out for.

Though Emerson Electric does not seem to have a wide-moat, the company can continue to build out its economic moat by focusing on high-value add technology, software, and data analytics offerings and by focusing more on specific niches.

Risks to Moat and Business Resilience

  • Technology Obsolescence: As noted before technology changes quickly which makes it harder to retain and sustain moats, especially for tech companies. Companies that create and sell software and hardware in competitive industries are particularly at risk.
  • Intense Competition: Although its long history creates some intangible brand value, the company’s business is relatively commodity-like (for industrial equipment etc). There is considerable competition in this industry from established players. Any company with slightly lower prices can gain market share easily.
  • Supply Chain Disruption: It’s reliant on a large supply chain, any issues to this will impact profitability negatively.
  • Pricing Pressures: Any issues with quality control could lead to lost contracts or market share. Furthermore, large players in the sectors that they operate in can put pricing pressure to take market share.
  • Loss of Key Talent: It’s a large company, with a need for many talented individuals, if there is a considerable management turn over, it can negatively affect its moat and business resilience.

The company is investing heavily in newer and more innovative methods to offset these risks, and to ensure that it remains profitable long into the future. They are focusing more on long-term contractual agreements and higher-margin businesses.

Understandability: 3/5

  • The core aspects of what Emerson Electric does, what their business segments are, and their economic goals are simple to comprehend.
  • The details behind a global company with diverse revenue streams are more complicated.
  • The nature of some of the operations, such as the software and automation solutions, does require a level of technical understanding to appreciate fully.
  • Financial reporting is straight forward with no complexity.

Balance Sheet Health: 4 / 5

  • Debt to equity ratio is somewhat high, but within manageable range.
  • The company has good cash flows from operations.
  • Company has had a trend of increasing assets while having stable debt.
  • The company has a good free cash flow even with all its investment and acquisitions.
  • Company has made stock buybacks a core part of its strategy.