Emerson Electric
October 2011
Price: $47
Research Report by
Peter Hughes, Check Capital Management
Emerson Electric (EMR) was
founded in 1890 to manufacture electric motors. Today
the company produces complex electrical and electronic
products for industrial and
commercial markets. EMR
has been remarkably consistent, raising its dividend for
54 consecutive years and
increasing profits in all but
three of the last 52 years.
Earnings Per Share and Dividends
$4.00
$3.00
$2.00
$1.00
$0.00
EPS
THE BUSINESS
Dividend/Share
* Expected Results for 2011
Emerson continues to make motors and electrical products. Over time, however, the company
has added much breadth and sophistication to its offerings. EMR produces many of the things
upon which industries are built—equipment for factories, power plants, data centers and other
facilities. Customers depend heavily on Emerson’s products to improve their operations. Most
of EMR’s offerings have long life-cycles, so they need not be replaced often. Although
complex, Emerson products are rarely subject to the rapid change common in many high-tech
industries. Thus, the company is very likely to maintain high marketshare for many years and
unlikely to be upended by radical innovations.
Management has focused on investing EMR’s resources in faster-growing businesses while
divesting slower-growing, lower-margin businesses. This has taken the company into moredifferentiated, less price-competitive technologies. Management has targeted global megatrends,
which it believes can enhance growth for many years. Such megatrends include continued resource scarcity, aging populations and increasing wireless connectivity. Emerson serves markets
with annual sales of about $145B, up from $90B in 2000 and indicative of the firm’s product
expansion. EMR is broadly diversified across many industries, minimizing its dependence on
any one sector of the world economy.
Emerson is also diversified geographically, deriving 60% of its sales outside the U.S. The
company ventured into China and India in the early 1980s, far earlier than many peers. EMR
now sells in 150 countries and has design centers in Europe, India and China as well as the U.S.
China accounts for 13% of sales, and emerging markets as a whole make up 34% of revenues.
1
Check Capital Management Inc.

Costa Mesa, CA.

(714) 641-3579
(800) 710-5777
Diversification and a strong emerging-markets position mitigates Emerson’s country-specific
risk and should help the company post higher growth in the future.
The company has five operating segments, each described below. Besides the Tools & Storage
unit, all have high marketshares and are often the top players in their respective markets.
Process Management
With over $6B in revenues
Segment Operating
and over $1B in operating
income, this is Emerson’s 25%
largest unit. It designs and
fabricates systems, compo- 20%
nents and services for such
industries as energy, chem- 15%
icals, beverages and power.
This segment’s output helps 10%
to maximize the performance
5%
of plants and facilities in
those industries. Products
0%
include measuring instruNetwork
Process
Climate
ments, meters, software,
Power
Management Technologies
sensors and valves used in
industrial processes and manufacturing.
Margin
Tools &
Storage
Industrial
Automation
Network Power Emerson’s second-largest segment makes efficiency-boosting equipment for
data centers and telecommunications
Sales by Segment
networks. Products include precision
cooling systems, electrical-switching
devices, power-backup technology and
uninterruptible power supplies. FurIndustrial
Network
Automation
thermore, EMR sometimes provides
Power
20%
on-site management of client systems.
27%
Tools &
Climate Technologies This unit proStorage
vides energy efficiency, food safety
8%
and comfort to residential and comClimate
mercial customers. Products include
Process
Technologies
Management
compressors, sensors, temperature
17%
28%
controls and ventilation systems.
Management recently emphasized an
example of the Climate Technologies
segment: Emerson’s design and construction of the air-conditioning system for China’s railway infrastructure expansion.
2
Check Capital Management Inc.

Costa Mesa, CA.

(714) 641-3579
(800) 710-5777
Industrial Automation Emerson’s third-largest segment furnishes tools that allow factories and
plants to elevate performance. Products include electric motors, industrial equipment and power
systems for manufacturers, energy companies and utilities. Applications include vehicle assembly lines, petrochemical processing, shopping-mall escalators and supermarket checkout stations.
Tools and Storage Many of this unit’s products are the descendants of Emerson’s original offerings, including fans, appliances, water heaters and various tools. This is now the firm’s smallest
segment and the only one with significant sales to retail markets.
MANAGEMENT
Emerson Electric’s experienced
Deployment of Cash ($ Billions)
management team adheres to a
proven, conservative philoso- $3
phy. David Farr joined the firm
in 1981, becoming CEO in
2000, and all other senior execu- $2
tives have been with the firm for
20+ years. Although EMR has
made many acquisitions under $1
Farr, they have generally been
of the small, “bolt-on” variety.
Farr has safeguarded Emerson’s $0
success by avoiding the risk of
2008
2009
2010
2011 YTD
big takeovers. As the adjacent
Share Repurchases
Dividends
Capital Expenditures
Acquisitions
chart reveals, in 2010 the company did make two substantial
acquisitions for $2.8B. However, as further outlined in the Financial Metrics section (page 4),
Farr’s tenure featured measured acquisitions and shareholder-oriented capital allocation.
Besides aligning the company with megatrends, management is pursuing growth by continuing
its focus on emerging markets. The goal is 45% of total sales arising from these faster-growing
economies by 2015. Overall, management expects sales to rise 30%-40% (to $32B-$35B) by
2015, with acquisitions accounting for about one-third of that growth. Long-term goals include
5%-7% sales growth, a 10%-14% free-cashflow margin and a 15%-25% return on capital.
Over the past decade, management has made the firm more efficient. Emerson has improved
asset utilization, with “working capital as a percent of sales” and “fixed assets as a percent of
sales” both declining substantially since 2000. During the 2008-09 recession, EMR further
reduced costs and streamlined operations. While many peers slashed capital expenditures, EMR
cut back only modestly. This positions the company well for an improving global economy.
3
Check Capital Management Inc.

Costa Mesa, CA.

(714) 641-3579
(800) 710-5777
Emerson recently reported strong results: Q2 sales rose 16% to $6.3B, organic “constant currency” growth was 10%, net income grew 17% to $683M and EPS increased 17% to 90¢. In Q3,
order trends have slowed with worries about the global economy but remained positive for all
units except Climate Technologies. Given the firm’s considerable order backlog, management
maintains that revenues should continue to grow for at least the next few quarters.
FINANCIAL METRICS
Throughout its history,
Key Statistics
(trailing four quarters ending 6/30/2011)
Emerson has consistently
increased its income and Revenue Net Income EPS
Net Margin Debt
built shareholder value.
$23.5B
$2.5B
$3.05
10.5%
$5.1B
By maintaining a solid balance
sheet, the firm is able to endure
Financial Metrics
economic slumps. Its financial
metrics are strong, with a net 25%
profit margin of 10% and a
20%
return-on-capital of 16%.
Emersion has $11B of intangible assets on its balance sheet
(46% of assets). Amortization
of intangibles in 2011 will total
about $260M, more than 10%
of net income. Thus, the firm’s
true economic earnings are substantially higher than reported
income.
Cash
$1.6B
ROC
16.1%
15%
10%
5%
0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Return on Capital
Net Profit Margin
EMR produces substantial free cashflow and returning it to shareholders is a management
priority. Of the $24B in cashflow produced over the past decade, 33% went to dividends, 20% to
share buybacks, 25% to net acquisitions and 22% to capital expenditures. Management expects
to regularly return 50%-60% of operating cashflow to shareholders, but in the short term more
will be allocated to debt reduction and less to share repurchases. Company stock now offers a
3.0% yield. The firm has retired 12% of its outstanding stock since 2000.
VALUATION / CONCLUSION
Emerson has long proven it can steadily increase shareholder value. The firm boasts a high share
of several sophisticated markets, an achievement purposefully built over decades. Although its
field is somewhat cyclical, EMR is diversified across many countries as well as industries and
should be able to produce a high return-on-capital over the course of an entire business cycle.
The company’s management—experienced and shareholder-oriented—has a long-term plan to
4
Check Capital Management Inc.

Costa Mesa, CA.

(714) 641-3579
(800) 710-5777
keep the firm growing. Given these factors, Emerson will likely perform well in the long run,
prospectively rewarding shareholders with a total annual return of over 10%.
25
$60
P/E Ratio
Price
$50
15 times Earnings Per Share
$40
20
$30
$20
15
$10
10
$0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Because of Emerson’s global market position and strong financial metrics, the stock historically
receives a premium valuation. As the graph (above right) shows, EMR stock has since 1990
frequently traded at more than 20 times earnings. Over the past five years its median P/E has
been 18. However, in recent months shares collapsed on fears that the world economy is
faltering. While we cannot predict short-term economic trends, Emerson’s stock price appears to
undervalue the company’s prospects. Thus, this may be an opportune time to buy one of the
world’s premier industrial companies.
[Please see footnotes below]
CCM Research Reports are for informational purposes only and are not an offer to sell or a solicitation to buy.
They are not personal recommendations for any particular investor and do not take into account the financial
circumstances of any individual investor. Check Capital, or one of its officers, may have a position in the securities
discussed and may purchase or sell such securities from time to time. CCM Research Reports are created using
third-party data. While Check Capital believes such third-party information is reliable, we do not guarantee its
accuracy, timeliness or completeness.
5
Check Capital Management Inc.

Costa Mesa, CA.

(714) 641-3579
(800) 710-5777