Episode 48 | Exploring Industrials: A Breakdown of Emerson Electric

In Episode 48 of “Market News with Rodney Lake,” Professor Lake, Director of the GW Investment Institute, discusses Emerson Electric as the company is critical in supporting infrastructure behind AI technology. With a market cap of $67 billion and annual revenue of approximately $17.6 billion, Emerson Electric has delivered moderate growth alongside a notable increase in gross margins, from 44% to 52% in recent years. Lake remarks that the net income and free cash flow have trended upward, supported by a strategic move into the higher-margin software business by acquiring Aspen Technology. However, the company’s balance sheet has weakened due to increased debt from the acquisition. Professor Lake advises analysts to pay close attention to how management executes this transition into digital solutions and controls the debt on their balance sheet.

Transcript

Thank you for joining “Market News with Rodney Lake.” This is a regular program for the GW Investment Institute where we talk about timely market topics. I'm Rodney Lake, the Director of the GW Investment Institute. Let's get started. Welcome back to “Market News with Rodney Lake.” I'm your host, Rodney Lake. Coming to you from Duquès Hall right here in the heart of Foggy Bottom. GW School of Business, GW Investment Institute show.
Today we're going to dive into a company that probably many of you have not heard about. It is called Emerson Electric. It is in one of our portfolios at the GW Investment Institute. Disclaimer educational and entertainment purposes only here. But this is a company that maybe is a divergence in the fact that you probably haven't heard of this.
You probably don't interact with this company. You've heard of Nvidia. You've heard of Apple. You've heard of Coca-Cola. These consumer facing companies and products you know and use in many cases. So you have some some idea about this. This is an industrial company. It's in our industrial sector. So we cover many sectors in our portfolios. We put them into six.
And our students pick those companies. In that in that portfolio or these all of our portfolios. And so Emerson Electric. So we're going to talk about Emerson Electric. You might not have heard about this company. The ticker is EMR. But we're going to go through. And as you know, if you've been following the show and welcome back to the people have been watching and welcome to the new people.
We're going to use the GW Investment Institute framework, business, management, price valuation, and balance sheet to cover this. Excuse me. So Emerson Electric, what is this business? Now we own it again. It's in our industrial sector. So it is an industrial company. They manufacture and design electrical and electrical equipment, software systems and services, for utilities, industrial, commercial, consumer markets.
It's a global company. We'll get into some stats here. So what are some of the stats for the company? So if you look at okay, let's start as we many times do to talk about okay, the high level things. So when we talk about Emerson Electric what's the market cap for Emerson. So the market cap and we're in early June, June 3rd when we're recording this one is $67 billion.
So this is not a tech giant. You know, this is not $1 trillion company. This is not even a $100 billion company. But it's not a small company. $67 billion. It's not a small company. I guess today, you know, maybe that's, we should revise some of what that means, given how big some of these companies have gotten.
Nvidia, Apple, Microsoft, Amazon, and the like, but not a small company, $67 billion. And we're going to we'll get into the business here. And so why are we talking about industrials? So one of the reasons that I wanted to talk about industrials is because there is so much talk about artificial intelligence. But behind that has to be all the things that have to work for artificial intelligence.
And so obviously the grid has to work. All the electrical systems have to work because all these data centers consume lots of power. And so Emerson Electric is absolutely part of that network and absolutely part of that world. And so this would be a derivative play, let's say, of AI, but certainly as that becomes more important, Emerson Electric is likely to become more important in that fabric of AI.
And it's been doing well in any case over the years. But I think it's it's time to focus in on that. We're we're coming into industrials now. We may or may not cover every single company that we own at any given time, but we're going to try to cover a lot of our companies in our portfolio.
But we've been again, talking about a lot of tech companies and a lot of consumer. So here we are safely in the industrial sector, at the moment. Again, market cap $67 billion for Emerson. But let's talk about the business. So let's get into their financial statements. And so when we talk about how big they are, $67 billion, that is the the market cap.
And but let's look at the revenue. What does that mean? So the revenue for this company, through March 2025, is $17 billion in the full year of 24. Their fiscal year ends in September. $17 billion, almost $17.5 billion. And so this company, again, is a large company, but not not super massive.
And what's been the revenue growth? So as we talk about two, we're going to try to look at this over the years. So if you look at 21, 22, 23, 24 and then the trailing 12 months back in 21, you had negative. So you're -23. So really bad shape. They look like they turned it around. Plus 6.7 plus 9.9 into 23 plus 15 into 24.
So really good year there. And it. We'll talk about some some of that and what's what's been happening with the company. But now you're at $17.6 billion for the last 12 months through March 31st, 2025 and a 6.5% growth rate. Not not fantastic, certainly a way down from the full year number for last year for the fiscal year 24.
And you're projecting for the full year for 25 fiscal year, which ends in the 9/30 is 3.4 and then the projected for 26. This is Wall Street consensus 4.9, so 3.4 4.9. So these are not enormous growth rates. So well we'll talk about it. And that's this is the business. Industrial companies are not going to grow like tech companies.
Unless they have some tech component which we'll, which we'll get to. Now, we often talk about the gross profits and the net profits, which we're going to do right here. So what are the gross profits for this business? So if you look at the gross profits, again this is an industrial company. But you may be surprised by these numbers.
So the gross profits are 52% and the net profits are more pedestrian. Let's say for industrials at 13%. And so that's obviously a big difference. But they have excellent gross margins. And I think that that's important. And they've grown those over time. And we'll get into that because one of their acquisitions really has been helping with that.
And if you look at again, we try to look at these metrics over time. You don't want to look at a just one year, because that may not tell the story, how the company is growing, how the company is evolving, what is management doing on the capital allocation side, which we'll get into. But if you look at the gross margins over time, from 21, 22, 23, 24, you're looking at 44, then 45, then 49, then 50, now 52, almost 53%, projected to stay right around 52% for the next two years.
That is excellent. And obviously they had it shift. Right. So if you go back from 21, and you look at now you're going from 44 to 52, that's excellent. And especially for such a large company, $67 billion market cap. You can't necessarily do that overnight. And that that's excellent. If you just see that information you would probably say, well, that is absolutely a positive check for management, which we haven't gotten to yet.
We're still in the business, but certainly that is an indicator that management is doing something right if they can grow their gross margins. Meanwhile, they've been growing their market cap $56 billion in 2021 and $67 billion now. So obviously, you typically get a higher margin, or higher multiple if you have higher margins. And so maybe that's what happened.
And we'll look at that, as well when we get into the price versus valuation. So these are good. But but then we get down to the net income here. And you talk about the profit margins. So the gross margins 9.2 billion and then 2.3 billion, for through September 30, excuse me, 31 2025. So again, high gross margins, pretty low net margins.
13.2, $2.3 billion in net income. And for the full year fiscal year last year, 1.9 billion. And that's 11%. So the trailing 12 months is slightly higher than that. But let's look at the net margins over that period. So 21 to 22, 21 was 11 and then it goes to almost 16 and then basically stayed at 16 for 23 and for the full year 24.
And we talked about 11. And it's it's improving. Now the expectation though is that for 25 and 26 again this is consensus estimates. Here you're going to 18 and 19. So that's very positive. And so when you look at that that's fantastic. Now let's also talk about the free cash flow for this business. For the trailing 12 months for March 31st, you're talking about 2.8 billion.
So not not, terrific, but certainly not bad. But let's look at it over time. You're looking at 21 to 25, 3.1 billion in free cash flow. 2.6 in 22. Then a major decrease here, 274 million, in 2023, back up to 2.9 in 2024. And now, for the trailing 12 months through March 31st, 2.8 projected 3.1 and 3.6 for 25 and 26.
So pretty good. These are not extraordinary numbers. So when we talk about what's our number, what's our score for the business side of this, you're probably going to talk about something like maybe a seven here. Right. So let's let's we'll put this safely in the seven category. We certainly would like those numbers to be a little bit better.
On the net margin side the numbers are moving in the right direction. So that says something about management which we're going to get to next. But that's very positive. All right. So now seven on the business. Now we're moving on to management. Now that the the CEO has been there a long time. And he's been in the spot for about four and a half years, as the CEO. Karsanbhai, I'm probably saying it wrong.
Lal Karsanbhai, his last name may elude me the correct pronunciation, but has been there, a long time at the company at about four and a half years as CEO. And I would say one of the most significant things that they have done is the acquisition for the Aspen Technologies. And so this has certainly made them much more like a industrial company that's moving into more digital solutions for their business.
And that has made a big difference. And you can see it, those margins have grown. That's super important. So when we talk about, okay, well what's happening with the business, this is, you know, this, you know, process and asset optimization software. They did this acquisition, very recently, just this past year, closed in March.
And so we'll see how this turns out. But but this is absolutely the future and the direction for Emerson. And this is something that's really important, for us to pay attention to. So you have an industrial company and we've talked about this before that many companies now, if you think about it, they're all just tech companies.
Because if you're not focused on how do you incorporate the new technology, how do you stay innovative? You're going to be out, right. You're going to get out. Competed tech is moving too fast. All these solutions are moving too fast. And if you're not keeping up, that means you're way behind. And if you're not pushing forward, that means you're way behind.
And it only takes, you know, a couple of years and now could happen even faster where you fall back against your competitors. And so what what is Emerson doing with respect to that? They bought this Aspen Technologies in the asset optimization space and they sell that software to their clients. Now I think it's super important to think about, you know, how does that work?
And you know, why would an industrial company buy a software company? But their customers have these big plans. They have these, you know, big systems, power plants. They're going to need, you know, ways to optimize those systems in ways that optimize, that equipment and that software is really going to help them do that over time. And again, this is a much higher margin business than the industrials.
And when we go back and we just take a quick look at, excuse me what's happening with respect to the margins. You can see that the margins are moving up. And again back in 2021 we were at 44%. And now we're almost at 53% for the trailing 12 months, projected to stay at 52% on the gross margin side.
And then even the net margins are now moving back up, and you're looking at 18% and 19% now, this acquisition was just fully done in March. So you can probably say that, well, okay, there's maybe some obvious connection between going from 13 to almost 19 and 19 in 26, from this business. Because software, as we've talked about when we talk about software companies, is a very high margin business.
And so when you add that to the equation, if you don't, you know, increase the other components of the business as fast, and that outpaces the growth internally, which maybe it looks like it's projected to do. Then the margins are going to improve. That's the basic math of the contribution to those margins. And so that looks good.
Now we'll have to pay close attention, you know, can they integrate this properly? Can they achieve those margins? So I think everybody talks about cost synergies, when these types of acquisitions happen. So I but I do think it's, really the top thing that I would be paying attention to for management is this acquisition. And so number one we talk about management is capital allocation.
These are the people who are in charge of the money for the business. And so you starts with the CEO and you have to say what what are they spending this money on? And in this case a major acquisition, a big addition to the business, just closed recently, in March. And we should be as investors, as analysts, as business people.
We should pay close attention to how this turns out. Are they going to get those synergies which will flow through to the margins? Are they going to get the synergies on the customers? Are they going to get this increase for the revenues that they're expecting? Now, so far so good. But it's early days and again. But the number one thing as analysts right now and certainly will be asking our students when we get back to class in the fall to check out is what's happening with this acquisition, with respect to the overall company.
And then we can really, you know, understand how effective management has been. It just happened. So it's very difficult to tell. Certainly. We've been existing shareholders for this company for a while. So we're optimistic about this. Excuse me. And I think it's important for us to pay close attention and evaluate it on its own as we move forward.
But because the reason to focus on this also is because it is a divergence from the traditional business. Now, the clients are in the same place, but it is a different type of business. The software business versus the traditional industrial business. So the number one thing, again, to pay attention to on the management side is this acquisition about Aspen Technologies.
So a couple of other things, to mention though, on the on the side of management, you know, this is a dividend payer. And so you've had a pretty good dividend for this company, 1.75% right now, as we sit here in early June of 2025, growing at 1.5, 1.15% over the last five years. So you're not not something that you're going to say like, oh, this is, this has been great.
But, you know, steady dividend payers, certainly over time, it important for us to pay attention to, not going to make or break the investment thesis for us and necessarily, but 1.75 is still a substantial dividend. And certainly as part of the equation, we want to make sure that we're aware of that. What that is what's the outlook for that.
Is it stable. That the answer is yes to to those things. But the dividends have not been growing, over at least over the last five years. You know, much more, certainly less, than GDP at this pace. So. All right, well, let's get into the next component then. So management, let's score management before we move on.
I would also give management in eight. Right now it looks like they're transforming the business. I do think the caveat there is that we got to pay close attention to what's happened on that capital allocation side. What is happening with this big acquisition of Aspen Technologies? This could obviously transform the business. But it's we got to pay close attention.
So that's at eight, for now with the caveat. We got to watch that closely. Let's move on to the valuation, for the company in the price versus valuation. So if we look at this, this company is not cheap. So when we look at an industrial company and you think, well, the gross margins are high, but the net margins are, you know, maybe going to get better.
But right now, again, in, in junior, you're paying 30 times for the forward. So that's not that that is, that's high. Or sorry the trailing and the forward, excuse me, at 20 times. So certainly we're projecting good things for this company. But for an industrial company, you know, that's not great. And so we'll have to pay close attention to this.
I would give this, if you're paying 20 times, you know, you're kind of around an average score for the market 21 times might be the overall S&P right now. And I would rate this as a better company. So we could probably give this, a seven on the price valuation. If you look at you know what, where is it
You know, relative to over time? In the last ten years, if you look at the PE, for the valuation, you've had a high of 41. We certainly you're not there in the low of 12 and we're not there. And the average is 24 and the median is 23. And so we're kind of right there. You know, we're we're a little bit below the average in the medians for the forward PE, which is the one that we care about.
And so nothing crazy. Not I wouldn't call it historically cheap by a lot. And it's certainly but not expensive, kind of maybe fairly valued to slightly less than that if you're looking at the forward PE for this only. But, you know, okay, well they got it. They got to achieve these margins. So these things are all interrelated, as you know.
And so we got to make sure that they, they hit on the things that have to, you know, be done for, that acquisition is with respect to the cost synergies with the expected revenue growth to justify that and certainly the 20 times could be, even better than. So we'll have to see, what happens there.
But overall that's probably a seven as well. All right. So now let's move on to the balance sheet. So what's happening with the balance sheet for Emerson? And so here is where we have some concern. So it's a big industrial company. So having some debt is is not a huge surprise. But if you as we mentioned to look at these things over time.
But let's take the snapshot first which is a balance sheet 1.9 billion in cash, 15 billion in debt. So a lot of net debt here. Even if we're generous, we'll call it 13 billion in net debt on the on the cash position generating 2.8 billion in cash. So again that's not great. That doesn't help us sleep at night.
We like to be in the net cash position for the Investment Institute. But all right so how should we think about this? Well let's look at the balance sheet over time. So back in 2021, 2.3 billion in cash, 7.2 billion in debt, a much more manageable, net debt situation there, right. Even you say, okay, let's be very generous with the numbers here and say it's just five to make it an even so in net debt, 5 billion generating back then 3.1 billion in net and free cash flow.
That's not something that we would be super concerned about. But here, here we are. It's levered up. And this is not great. Right. So the year over year, the fiscal year 20 9/30 8.3 and then now for the March 31, 15 billion in debt. So that's a big change. You know, obviously connected to the the big acquisition.
And so this is something that we have to be aware of. This is something that we have to pay close attention to. Excuse me. That's not great. Now can they pay that debt down over time? You know, the projection is the free cash flow will pick up again 3.1, 3.6 and 25 and 26, respectively, but it's not great.
Now, one of the things that we ask our analyst to check in that we should check here is okay, well, well, what is that for the interest coverage ratio? You know, we like to be 10 plus. This is 6.5. So that is remember EBIT earnings before interest and tax over interest expense. And so 6.5. It's not horrible but it's not great.
We certainly like to be closer to that 10 number. To help us sleep a little bit at night. So probably going to give the balance sheet of six here. And so if you pull scores together, you know, you can go up and down a little bit here and there for those scores. But you're, you're probably looking at a 6.75 or let's say a 7 if we just average some of them out.
And so the company overall is a 7. The thing to watch is really on the balance sheet, watch what's happening with management. We gotta pay close attention. You know, is this a transformative acquisition? Is Emerson going to get to participate in this AI, you know, boom time? If they have their place in that whole setup, are they able to get those higher margins, from this digital solution business?
Aspen Technology, time will tell. We’ll be asking our analysts to pay close attention to what is happening there. And that is something that will be kicking off the fall semester with. That's it for this episode for Market News with Rodney Lake. We'll see you back on the next episode. Thank you.
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