Morningstar Equity Analyst Report | Report as of 02 Feb 2016 | Page 1 of 10
Emerson Electric Co EMR (XNYS)
For BOS Product Risk Rating, please Click Here
Morningstar Rating
Last Price
Fair Value Estimate
Price/Fair Value
Dividend Yield %
Market Cap (Bil)
Industry
Stewardship
QQQQ
45.50 USD
62.00 USD
0.73
4.14
29.78
Diversified Industrials
Standard
01 Feb 2016
01 Feb 2016
01 Feb 2016
01 Feb 2016
Morningstar Pillars
Analyst
Quantitative
Economic Moat
Valuation
Uncertainty
Financial Health
Wide
QQQQ
Medium
—
Wide
Undervalued
Medium
Strong
Source: Morningstar Equity Research
EMR
pUSA
Fairly Valued
Price/Quant Fair Value
Price/Earnings
Forward P/E
Price/Cash Flow
Price/Free Cash Flow
Dividend Yield %
Barbara Noverini, Analyst, 31 August 2015
returns going forward.
Investment Thesis
Quantitative Valuation
Undervalued
Wide Moat Emerson Executes Well in Fiscal First Quarter Despite Tough
Spending Environment
Overvalued
Current
5-Yr Avg
0.79
11.4
13.6
12.2
16.7
4.14
0.95
19.1
—
12.5
15.7
3.06
Sector Country
0.87
16.3
12.5
9.5
16.0
2.43
0.88
18.9
13.1
10.7
17.0
2.43
Emerson’s five operating segments offer an extensive
array of automation, HVAC, and electrical products
equipped to support small and large-scale systems in a
variety of end markets. The most profitable segments
manage to translate customer reliance on total system
solutions, which bundle proprietary Emerson equipment
with human and knowledge capital, into higher-margin
sales and stronger customer relationships. This dynamic
allows Emerson to rise above commodity producers of
parts and equipment in the competitive landscape.
Source: Morningstar
Bulls Say
OEmerson has diligently returned value to
shareholders, distributing more than 80% of its
free cash flow to the firm through dividends and
share buybacks over the past decade.
OEmerson's reputation in process automation
has enabled it to be an industry leader across key
end markets.
OEmerson’s commitment to and experience in
emerging markets develops strong roots and
recognition in fast-growing regions of the world.
We view process management as Emerson’s crown jewel,
representing nearly one third of sales and boasting
average operating margins of nearly 20% over the past
five years. The segment benefits from a growing customer
desire to remotely control all facility operations from
centralized locations, creating opportunity to more deeply
penetrate a customer’s enterprise and offer higher-margin
products and services. With 43% of revenue tied to oil
and gas, we expect process sales to suffer in the near
term. However, with two thirds of this energy sector
exposure tied to the production-reliant mid- and
down-stream markets, we expect a basic level of demand
for process optimization to persist.
Bears Say
ORoughly one third of Emerson’s 2014 sales
originated from the energy sector, a weighty
exposure that could stress consolidated
profitability in an extended downturn.
OEmerson may spread itself too thin reaching for
growth in swiftly developing emerging markets.
OCompetitive issues in network power continue
to overshadow other businesses in the portfolio
and may monopolize management's focus.
Ongoing innovation in regulatory-compliant HVAC
products supports strong returns in the climate
technologies segment, which represented about one sixth
of sales and produced 17% average operating margins
over the past five years. Near term, climate is well
positioned to benefit from strengthening U.S. construction
markets, while longer-term opportunity exists in emerging
markets needing infrastructure development. We expect
these same macro trends to benefit Emerson’s commercial
and residential segment, which sells branded tools and
storage products that command the highest margins in
the company, at over 22%.
We believe persistent underperformance in network
power and industrial automation can be blamed on a
higher concentration of commoditylike products, as well
as some ill-timed acquisitions. Recent divestitures should
realign focus on developing total system solutions for
these segments, which we believe will improve their
Barbara Noverini, Analyst, 02 February 2016
Analyst Note
Despite facing significant headwinds in its oil and gas
businesses in the first fiscal quarter, Emerson displayed
the resilience we’ve come to expect from wide-moat firms
during periods of cyclical weakness, and we reiterate our
fair value estimate of $62 per share. In our view, successful
execution of Emerson’s 2016 plans for long-lasting
portfolio improvement through restructuring, asset
divestitures, and the impending separation of the Network
Power segment supports an estimated upside of about
35%, and we maintain that Emerson has ample
opportunity for self-help amidst an otherwise challenging
macroeconomic backdrop.
Consolidated revenue fell almost 16% year over year to
$4.7 billion, as the negative impacts of currency
translation and divestitures intensified a 9% decline in
Emerson’s underlying sales. The Process Management
and Industrial Automation segments suffered ongoing ill
effects of reduced spending in upstream oil and gas;
however, Process Management continued to shift
resources toward serving relatively stronger end markets,
such as life sciences and small to midsize projects in
downstream power and chemical sectors, while
preparations to divest parts of the Industrial Automation
segment remain under way. Furthermore, strong activity
in U.S. construction markets benefited Emerson’s Climate
and Commercial and Residential Solutions segments,
which we believe can support stronger underlying sales
growth as the year progresses.
Although segment operating margins (excluding corporate
expenses) contracted 170 basis points year over year to
13.3%, the benefits of restructuring actions in 2015 helped
to mitigate the negative effects of volume deleveraging.
Management is prepared to flex up restructuring programs
should conditions weaken in Emerson's oil and gas-related
businesses; however, we expect that improving sales in
Emerson's residential, commercial, and consumer-focused
businesses will also provide some counterbalance
throughout fiscal 2016.
Economic Moat
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Morningstar Equity Analyst Report |Page 2 of 10
Emerson Electric Co EMR (XNYS)
For BOS Product Risk Rating, please Click Here
Morningstar Rating
Last Price
Fair Value Estimate
Price/Fair Value
Dividend Yield %
Market Cap (Bil)
Industry
Stewardship
QQQQ
45.50 USD
62.00 USD
0.73
4.14
29.78
Diversified Industrials
Standard
01 Feb 2016
01 Feb 2016
01 Feb 2016
01 Feb 2016
Close Competitors
Currency (Mil)
Market Cap
TTM Sales
Operating Margin
TTM/PE
Honeywell International Inc HON
USD
79,289
38,865
16.30
18.02
ABB Ltd ABB
USD
38,157
37,889
10.80
15.36
Schneider Electric SE SU
EUR
27,644
26,087
11.03
16.72
Eaton Corp PLC ETN
USD
23,242
21,363
8.22
11.63
Barbara Noverini, Analyst, 31 August 2015
A steady history of midteen returns on invested capital
supports our belief that Emerson benefits from a wide
economic moat. Over the past 10 years, Emerson averaged
over 15% ROICs (including goodwill) relative to a
weighted average cost of capital of around 8.4%. That
returns remained well above the cost of capital during a
period that included one of the more difficult global
recessions in recent history speaks to the staying power
of Emerson’s portfolio of products and services. In our
opinion, the company’s competitive advantages stem from
three main moat sources: customer switching costs,
intangible assets, and cost advantage.
We view a vast installed base as physical evidence of
customer switching costs, a strong competitive advantage
that protects relationships and drives margin growth as
higher-margin revenue streams spring from the installed
base over time. Worldwide, Emerson’s installed base
represents over $250 billion of infrastructure architecture,
a figure that describes the magnitude of customer
investment in products and systems, with lifecycles that
span anywhere from a few years to several decades.
Demand for automation equipment depends on
customers' capital expense budgets. However, once a
contract is signed, the relationship is fairly sticky.
Changing suppliers involves swapping out equipment, and
discovering bugs after new installation could result in
unplanned facility downtime. As such, opportunity costs
often outweigh the benefits of switching.
As the incumbent vendor, Emerson benefits from inertia.
A customer in motion is motivated to stay in motion by
avoiding profit-eroding downtime as much as possible. It
would take years for a competitor to completely displace
Emerson equipment at a large-scale enterprise customer
with several active facilities across the globe, a daunting
operational challenge that could easily damp the allure
of switching vendors from the customer’s perspective.
That said, equipment and part manufacturers are merely
commodity producers if they can’t figure out a way to
differentiate themselves. Many of Emerson’s products,
such as actuators, motors, and valves, lack distinguishing
characteristics. The strongest segments in Emerson’s
portfolio, process management and climate technologies,
manage to separate themselves from commodity
producers by increasing customer reliance in two ways:
first, offering aftermarket parts, maintenance service, and
other enhancements, and second, bundling products into
total systems. The former protects the customer’s
investment, while the latter allows Emerson to customize
solutions for the unique needs of their customers as their
businesses evolve. Evidence of sticky customer
relationships exists in the 75% of process management
customers that view Emerson at some kind of preferential
vendor level. In our view, this progression also supports
our confidence in Emerson’s sustaining economic profits
over the 20 years required by our wide moat classification.
Process management equipment lasts on average 20-40
years, securing a lengthy customer relationship. Relatively
insulated from competition over the product lifecycle,
Emerson has the opportunity to drive additional
higher-margin incremental revenue as it graduates from
a preferred supplier to a trusted customer adviser over
time.
Service centers also represent a source of customer
switching costs. Emerson’s service infrastructure spans
the globe and includes 352 process management centers,
277 network power centers, and 22 climate technology
centers. Since 2011, Emerson has increased the number
of facilities by 11% and expects to expand the network an
additional 10% over the course of the next three years.
With service facilities located in close proximity to key
customer accounts, reliability assurance adds an
additional layer of customer stickiness.
Like many diversified industrial companies, Emerson relies
on research and development to bring new products to
market. However, we’d argue that proprietary patents are
less important to the overall business. Rather, other
intangible assets such as regulatory approvals and strong
brands appear to create more value throughout the
enterprise. Maintaining compliance with Environmental
Protection Agency emission regulations drives sales in
Emerson’s outperforming process management and
climate technology segments. In process, for example,
systems to operate power plants are designed to satisfy
regulatory requirements, whereas in climate, product
innovation is driven by the ever-increasing necessity to
reduce harmful emissions. In our view, Emerson’s history
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Morningstar Equity Analyst Report |Page 3 of 10
Emerson Electric Co EMR (XNYS)
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Morningstar Rating
Last Price
Fair Value Estimate
Price/Fair Value
Dividend Yield %
Market Cap (Bil)
Industry
Stewardship
QQQQ
45.50 USD
62.00 USD
0.73
4.14
29.78
Diversified Industrials
Standard
01 Feb 2016
01 Feb 2016
01 Feb 2016
01 Feb 2016
of winning regulatory approvals for its products is an
often-overlooked advantage that sets it apart from new
entrants. Brands are especially important in residential
and commercial solutions, which rivals process
management in operating margins and overall segment
returns on total capital. While this segment is more
exposed to consumers through its do-it-yourself channel,
strong brands protect market leadership and pricing
power in this channel. Emerson’s best-known brands
include RIGID tools (professional tools are still
manufactured by Emerson, whereas Home Depot licenses
the RIGID brand for the consumer-oriented product sold
in its stores), ClosetMaid organizers, and InSinkErator
garbage disposals.
We expect consolidated operating margins to average
16.5% throughout our forecast period, about 60 basis
points higher than the most recent five-year average.
While we expect that Emerson’s more profitable segments
will continue to enjoy margin expansion, near-term
weakness in process management and industrial
automation will probably crimp the overall level of average
improvement. That said, we believe this steady cadence
of consolidated profitability growth is consistent with
Emerson’s history of producing strong returns on invested
capital. Our five-year explicit forecast shows ROICs
averaging 15% and peaking at just about 15.8% in 2017-18
as process begins to recover.
Risk
In addition to enhancing returns in stronger segments,
Emerson’s economies of scale provide an important
advantage for the segments that are more
commodity-oriented, such as industrial automation and
network power. These segments each have a high
proportion of fairly undifferentiated products, leaving
them vulnerable to price competition. These segments
create value primarily by producing commodity products
at the lowest cost, made possible by scale advantages in
sourcing.
Valuation
Barbara Noverini, Analyst, 04 August 2015
We’re cutting our fair value estimate for Emerson Electric
to $62 from $65 per share, following fiscal third-quarter
results commentary that suggest recovery in key end
markets is likely to take longer than we initially
anticipated. Weak organic growth in fiscal 2015 is
projected to carry through 2016, which crimped our
expectations for average organic sales growth over our
five-year forecast period to just over 2%. In particular, we
expect process management will see sales declines of
about 3% through 2016, as oil and gas production rates
fall off in mid-2015 and beyond. We forecast GDP-like
growth for the segment in the following years. We also
assume that acquisitions will add about $2 billion to the
top line, a figure that we believe reflects the company’s
most recent cadence of bolt-on acquisitions, rather than
larger-scale M&A that we are reticent to specifically
forecast. At present, we continue to include Network
Power in our valuation, despite Emerson's recently
announced intentions to ultimately spin off or divest this
business.
Barbara Noverini, Analyst, 31 August 2015
We assign a medium uncertainty rating to Emerson as the
company's exposure to cyclical end markets is mitigated
by a diverse set of businesses and customers, reducing
volatility to cash flow; we believe this phenomenon is
evident in relatively steady returns on invested capital over
the years. High operating leverage can affect profitability,
especially during cyclical peaks and troughs when volume
is most affected; we attempt to temper this effect in our
discounted cash flow model by employing what we believe
is a sustainable midcycle operating margin. Cash flow
generation is also affected by M&A, as the company has
historically spent roughly 2% of sales on acquisitions that
subject it to both valuation and integration risks.
Management
Barbara Noverini, Analyst, 02 April 2015
CEO David Farr has more than 30 years of experience with
Emerson in various roles. He took the helm in 2000 and
also became chairman of the board four years later. While
we’d prefer to see the CEO and chairman roles separated,
we’ll concede that shareholders have enjoyed an excellent
record of value creation under his leadership. Farr
demonstrated his focus on longer-term value creation in
2000 by deliberately shedding underperforming
businesses and adding high-return businesses in growing
markets. Under Farr's watch, the firm has built a healthy
presence in emerging markets, adding new sources of
income for investors. In addition, Emerson has a long
history of returning capital to shareholders in the form of
dividends and share buybacks supported by strong free
cash flow. We’ll partially attribute this success to
performance metrics that focus on cash flow and returns
on total capital; as such, we award Emerson a Standard
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written permission. To order reprints, call +1 312-696-6100. To license the research, call +1 312-696-6869. See last page for important disclosures.
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Morningstar Equity Analyst Report |Page 4 of 10
Emerson Electric Co EMR (XNYS)
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Morningstar Rating
Last Price
Fair Value Estimate
Price/Fair Value
Dividend Yield %
Market Cap (Bil)
Industry
Stewardship
QQQQ
45.50 USD
62.00 USD
0.73
4.14
29.78
Diversified Industrials
Standard
01 Feb 2016
01 Feb 2016
01 Feb 2016
01 Feb 2016
Stewardship Rating.
That said, ill-timed acquisitions in network power give us
pause and prevent us from awarding Emerson an
exemplary rating. Chasing growth in the rapidly evolving
segment led to the purchase of Artesyn in 2006 and
Chloride in 2010, arguably at the top of the cycle in both
cases. Persistent underperformance in the segment led
to $500 million-plus worth of impairments in each year
during 2012, 2013, and 2014 as Emerson sought to sell
these businesses less than half a decade after paying up
for them. Farr’s cash bonus was reduced in 2014 because
of the Chloride impairment, in particular, which we believe
is a good-faith effort on his part to demonstrate
responsibility. Returns on invested capital remain strong
despite these missteps, and we expect that Farr’s
capital-allocation focus will remain more firmly rooted in
markets where Emerson displays a clear competitive
edge.
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Morningstar Equity Analyst Report |Page 5 of 10
Emerson Electric Co EMR (XNYS)
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Morningstar Rating
Last Price
Fair Value Estimate
Price/Fair Value
Dividend Yield %
Market Cap (Bil)
Industry
Stewardship
QQQQ
45.50 USD
62.00 USD
0.73
4.14
29.78
Diversified Industrials
Standard
01 Feb 2016
01 Feb 2016
01 Feb 2016
01 Feb 2016
Barbara Noverini, Analyst, 03 November 2015
Analyst Notes Archive
Wide Moat Emerson Executes Well in Fiscal First
Quarter Despite Tough Spending Environment
Barbara Noverini, Analyst, 02 February 2016
Despite facing significant headwinds in its oil and gas
businesses in the first fiscal quarter, Emerson displayed
the resilience we’ve come to expect from wide-moat firms
during periods of cyclical weakness, and we reiterate our
fair value estimate of $62 per share. In our view,
successful execution of Emerson’s 2016 plans for
long-lasting portfolio improvement through restructuring,
asset divestitures, and the impending separation of the
Network Power segment supports an estimated upside of
about 35%, and we maintain that Emerson has ample
opportunity for self-help amidst an otherwise challenging
macroeconomic backdrop.
Consolidated revenue fell almost 16% year over year to
$4.7 billion, as the negative impacts of currency
translation and divestitures intensified a 9% decline in
Emerson’s underlying sales. The Process Management
and Industrial Automation segments suffered ongoing ill
effects of reduced spending in upstream oil and gas;
however, Process Management continued to shift
resources toward serving relatively stronger end markets,
such as life sciences and small to midsize projects in
downstream power and chemical sectors, while
preparations to divest parts of the Industrial Automation
segment remain under way. Furthermore, strong activity
in U.S. construction markets benefited Emerson’s Climate
and Commercial and Residential Solutions segments,
which we believe can support stronger underlying sales
growth as the year progresses.
Although segment operating margins (excluding
corporate expenses) contracted 170 basis points year over
year to 13.3%, the benefits of restructuring actions in 2015
helped to mitigate the negative effects of volume
deleveraging. Management is prepared to flex up
restructuring programs should conditions weaken in
Emerson's oil and gas-related businesses; however, we
expect that improving sales in Emerson's residential,
commercial, and consumer-focused businesses will also
provide some counterbalance throughout fiscal 2016.
After Emerson’s fourth-quarter earnings release, we’re
maintaining our $62 fair value estimate and wide moat
rating. CEO David Farr proclaimed that the end of the fiscal
year reflected the acceleration of a global industrial
recession brought on by a weakened oil and gas sector
and softening growth in emerging markets. Consolidated
revenue tumbled nearly 15% year over year to $5.8 billion,
as the negative impacts of foreign exchange and
divestitures exacerbated a 7% decline in the company’s
underlying sales. Emerson’s Process Management and
Industrial Automation segments, both heavily exposed to
upstream oil activity in several geographies, reported the
steepest sales declines of 10% and 12%, respectively,
when excluding foreign exchange and divestitures. Lower
demand in China contributed to an underlying sales
decrease of 5% in Climate Technologies; however, the
segment also faced difficult comparisons from an
exceptionally strong quarter of sales in the prior period as
OEMs built inventory in anticipation of regulatory changes
in the residential air conditioning market. Only Commercial
& Residential Solutions grew underlying sales year over
year, as strength in U.S. construction and higher demand
in Europe supported an increase of 3%.
Business segment operating margins (excluding corporate
costs and divestiture gains) declined 450 basis points year
over year to 15.7%, reflecting negative operating leverage
from weaker volumes and higher restructuring costs.
Although we project 2016 to be another challenging year,
the spin-off or sale of Emerson’s Network Power business
is an interesting catalyst on the horizon. Divesting this
low-margin business should boost Emerson’s cash flow
engine over time. In addition, we expect that $221 million
of restructuring actions taken throughout fiscal 2015 will
begin to bear fruit in 2016, as a lighter cost base protects
margins against persistent top-line weakness in the
segments most exposed to soft end-market spending.
Accelerating End-Market Weakness Weighs on
Underlying Sales in Emerson’s Fiscal Fourth Quarter
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6 of1 10
Quantitative Equity Report | Release: 02 Feb 2016, 16:30, GMT-06:00 | Reporting Currency: USD | Trading Currency: USD
Emerson Electric Co EMR
Last Close 02 Feb 2016
Quantitative Fair Value Est 01 Feb 2016
45.84
57.95
Emerson Electric Co is engaged in designing and supplying
products and technology, and delivering engineering services
and solutions in industrial, commercial and consumer markets.
Market Cap 02 Feb 2016
Sector
Rating,
please Click Here
IndustryFor BOS Product Risk
Country
of Domicile
29,782.3 Mil
p Industrials
Diversified Industrials
USA United States
Price Versus Quantitative Fair Value
2012
2013
2014
2015
2016
2017
Sales/Share
Forecast Range
Forcasted Price
Dividend
Split
Quantitative Fair Value Estimate
90
Total Return
Quantitative Scores
72
Scores
Momentum:
Negative
Standard Deviation: 16.73
Liquidity: High
All Rel Sector Rel Country
Quantitative Moat
Wide
100
Valuation
Undervalued 79
Quantitative Uncertainty Medium
100
Financial Health
Strong
81
100
83
100
76
54
100
76
99
81
36
41.25
52-Wk
62.75
39.50
5-Yr
70.66
18
EMR
pUSA
Undervalued
Fairly Valued
Overvalued
Source: Morningstar Equity Research
Valuation
Sector
Median
Country
Median
0.95
19.1
—
12.5
15.7
3.06
3.9
1.7
0.87
16.3
12.5
9.5
16.0
2.43
1.5
0.8
0.88
18.9
13.1
10.7
17.0
2.43
2.0
1.6
Current 5-Yr Avg
Sector
Median
Country
Median
11.0
4.6
457.8
Current 5-Yr Avg
Price/Quant Fair Value
Price/Earnings
Forward P/E
Price/Cash Flow
Price/Free Cash Flow
Dividend Yield %
Price/Book
Price/Sales
0.79
11.4
13.6
12.2
16.7
4.14
3.7
1.4
Profitability
Return on Equity %
Return on Assets %
Revenue/Employee (K)
29.8
11.7
—
22.7
9.5
—
Quantitative Moat
17.1
0.9
3.04
19.0
1.6
35.6
2.5
2.37
25.4
2.1
-9.5
-22.4
2.85
20.2
1.8
-19.5
-20.2
3.94
11.9
1.5
-4.2
1.4
4.14
11.4
1.4
Total Return %
+/– Market (Morningstar US Index)
Dividend Yield %
Price/Earnings
Price/Revenue
Morningstar RatingQ
QQQQQ
QQQQ
QQQ
QQ
Q
Financials (Fiscal Year in Mil)
Revenue
% Change
2011
2012
2013
2014
2015
TTM
24,222
15.1
24,412
0.8
24,669
1.1
24,537
-0.5
22,304
-9.1
22,304
0.0
3,854
22.7
2,480
3,740
-3.0
1,968
4,304
15.1
2,004
4,443
3.2
2,147
3,864
-13.0
2,710
3,864
0.0
2,710
Operating Income
% Change
Net Income
11.9
4.7
303.8
3,233
-647
2,586
10.7
3,053
-665
2,388
9.8
3,649
-678
2,971
12.0
3,692
-767
2,925
11.9
2,529
-685
1,844
8.3
2,529
-685
1,844
8.3
Operating Cash Flow
Capital Spending
Free Cash Flow
% Sales
Score
100
3.27
15.1
3.43
2.67
-18.3
3.15
2.76
3.4
3.91
3.03
9.8
4.12
3.99
31.7
3.10
3.99
0.0
2.73
EPS
% Change
Free Cash Flow/Share
1.38
14.07
722,641
1.60
14.53
704,388
1.64
14.32
688,677
1.72
15.53
654,557
1.88
13.37
—
1.88
12.35
654,557
24.6
10.6
10.2
1.04
2.3
19.0
8.3
8.1
1.02
2.3
19.2
8.3
8.1
1.02
2.3
20.7
8.8
8.8
1.00
2.4
29.8
11.7
12.2
0.96
2.7
29.8
11.7
12.2
0.96
2.7
Profitability
Return on Equity %
Return on Assets %
Net Margin %
Asset Turnover
Financial Leverage
39.5
15.9
4,324
40.0
15.3
3,787
40.3
17.5
4,055
41.4
18.1
3,559
40.6
17.3
4,289
40.6
17.3
4,289
Gross Margin %
Operating Margin %
Long-Term Debt
10,399
7.2
10,295
7.0
10,585
6.9
10,119
6.8
8,081
6.2
8,081
6.2
Total Equity
Fixed Asset Turns
80
Dividends/Share
Book Value/Share
Shares Outstanding (K)
60
40
20
0
2009
2010
2011
2012
2013
2014
2015
Financial Health
Current 5-Yr Avg
Distance to Default
Solvency Score
Assets/Equity
Long-Term Debt/Equity
0.7
335.9
2.7
0.5
0.8
—
2.4
0.4
2016
Sector
Median
Country
Median
0.6
492.0
1.8
0.2
0.6
575.7
1.7
0.3
Growth Per Share
Revenue %
Operating Income %
Earnings %
Dividends %
Book Value %
Stock Total Return %
1-Year
3-Year
5-Year
10-Year
-9.1
-13.0
31.4
9.3
-15.0
-19.1
-3.0
-3.7
14.5
5.5
-4.6
-4.1
1.2
4.2
9.0
7.0
-1.0
-2.0
2.6
4.2
9.0
8.5
3.2
4.5
Quarterly Revenue & EPS
Revenue (Mil)
Dec
Mar
2015
5,587.0 5,400.0
2014
5,606.0 5,812.0
2013
5,553.0 5,960.0
2012
5,309.0 5,919.0
Earnings Per Share ()
2015
0.75
1.42
2014
0.65
0.77
2013
0.62
0.77
2012
0.50
0.74
Revenue Growth Year On Year %
Jun
5,503.0
6,312.0
6,344.0
6,484.0
Sep
5,814.0
6,807.0
6,812.0
6,700.0
Total
22,304.0
24,537.0
24,669.0
24,412.0
0.84
1.03
0.27
1.04
0.98
0.59
1.11
0.39
3.99
3.03
2.76
2.67
1.7
1.0
-0.5
-0.1
-0.3
-2.5
-7.1
-12.8
-14.6
2013
2014
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Fundamental Analysis
At Morningstar, we believe buying shares of superior
businesses at a discount and allowing them to compound over time is the surest way to create wealth in
the stock market. The long-term fundamentals of businesses, such as cash flow, competition, economic cycles, and stewardship, are our primary focus. Occasionally, this approach causes our recommendations to
appear out of step with the market, but willingness to
be contrarian is an important source of outperformance and a benefit of Morningstar’s independence.
Our analysts conduct primary research to inform our
views on each firm’s moat, fair value and uncertainty.
Fundamental Economic
Fair Value
Moat Rating Estimate
Analysis
Uncertainty
Assessment
QQQQQ
QQQQ
QQQ
QQ
Q
Star
Rating
Economic Moat
The economic moat concept is a cornerstone of Morningstar’s investment philosophy and is used to distinguish high-quality companies with sustainable competitive advantages. An economic moat is a structural
feature that allows a firm to sustain excess returns
over a long period of time. Without a moat, a company’s profits are more susceptible to competition. Companies with narrow moats are likely to achieve normalized excess returns beyond 10 years while wide-moat
companies are likely to sustain excess returns beyond
20 years. The longer a firm generates economic profits,
the higher its intrinsic value. We believe lower-quality
no-moat companies will see their returns gravitate to-
ward the firm’s cost of capital more quickly than companies with moats will. We have identified five sources of
economic moats: intangible assets, switching costs,
network effect, cost advantage, and efficient scale.
Fair Value Estimate
Our analyst-driven fair value estimate is based primarily on Morningstar’s proprietary three-stage discounted
cash flow model. We also use a variety of supplementary fundamental methods to triangulate a company’s
worth, such as sum-of-the-parts, multiples, and yields,
among others. We’re looking well beyond next quarter
to determine the cash-generating ability of a company’s
assets because we believe the market price of a security will migrate toward the firm’s intrinsic value over
time. Economic moats are not only an important sorting
mechanism for quality in our framework, but the designation also directly contributes to our estimate of a
company’s intrinsic value through sustained excess returns on invested capital.
Uncertainty Rating
The Morningstar Uncertainty Rating demonstrates our
assessment of a firm’s cash flow predictability, or valuation risk. From this rating, we determine appropriate
margins of safety: The higher the uncertainty, the wider
the margin of safety around our fair value estimate before our recommendations are triggered. Our uncertainty ratings are low, medium, high, very high, and extreme. With each uncertainty rating is a corresponding
set of price/fair value ratios that drive our recommendations: Lower price/fair value ratios (<1.0) lead to positive recommendations, while higher price/fair value
Economic Moat
C O M PE T I T I V E F O R C E S
WIDE
Moat Sources:
Intangible
Assets
NARROW
NONE
Switching
Costs
COMPANY PROFITABILITY
Network
Effect
Cost
Advantage
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Morningstar Equity Research Methodology
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ratios (>1.0) lead to negative recommendations. In very
rare cases, the fair value estimate for a firm is so unpredictable that a margin of safety cannot be properly
estimated. For these firms, we use a rating of extreme.
Very high and extreme uncertainty companies tend to
have higher risk and volatility.
Quantitatively Driven Valuations
To complement our analysts’ work, we produce Quantitative Ratings for a much larger universe of companies.
These ratings are generated by statistical models that
are meant to divine the relationships between Morningstar’s analyst-driven ratings and key financial data
points. Consequently, our quantitative ratings are directly analogous to our analyst-driven ratings.
Quantitative Fair Value Estimate (QFVE): The QFVE is
analogous to Morningstar’s fair value estimate for
stocks. It represents the per-share value of the equity
of a company. The QFVE is displayed in the same currency as the company’s last close price.
Valuation: The valuation is based on the ratio of a company’s quantitative fair value estimate to its last close price.
Understanding Differences Between Analyst
and Quantitative Valuations
If our analyst-driven ratings did not sometimes differ
from our quantitative ratings, there would be little value in producing both. Differences occur because our
quantitative ratings are essentially a highly sophisticated analysis of the analyst-driven ratings of comparable companies. If a company is unique and has few
comparable companies, the quantitative model will
have more trouble assigning correct ratings, while an
analyst will have an easier time recognizing the true
characteristics of the company. On the other hand, the
quantitative models incorporate new data efficiently
and consistently. Empirically, we find quantitative ratings and analyst-driven ratings to be equally powerful
predictors of future performance. When the analystdriven rating and the quantitative rating agree, we find
the ratings to be much more predictive than when they
differ. In this way, they provide an excellent second
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Quantitative Uncertainty: This rating describes our level of uncertainty about the accuracy of our quantitative
fair value estimate. In this way it is analogous to Morningstar’s fair value uncertainty ratings.
Quantitative Economic Moat: The quantitative moat
rating is analogous to Morningstar’s analyst-driven
economic moat rating in that both are meant to describe the strength of a firm’s competitive position.
Uncertainty Rating
Price/Fair Value
2.00
Q
1.75
175%
1.50
1.25
1.00
0.75
155%
125%
95%
QQ
135%
105%
80%
125%
115%
110%
QQQ
90%
85%
80%
70%
60%
0.50
50%
QQQQ
QQQQQ
0.25
Low
Uncertainty Rating
Medium
High
Very High
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Emerson Electric Co EMR (XNYS)
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Morningstar Rating
Last Price
Fair Value Estimate
Price/Fair Value
Dividend Yield %
Market Cap (Bil)
Industry
Stewardship
QQQQ
45.50 USD
62.00 USD
0.73
4.14
29.78
Diversified Industrials
Standard
01 Feb 2016
01 Feb 2016
01 Feb 2016
01 Feb 2016
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Morningstar Equity Analyst Report |Page 10 of 10
Emerson Electric Co EMR (XNYS)
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Morningstar Rating
Last Price
Fair Value Estimate
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Dividend Yield %
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Industry
Stewardship
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45.50 USD
62.00 USD
0.73
4.14
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Diversified Industrials
Standard
01 Feb 2016
01 Feb 2016
01 Feb 2016
01 Feb 2016
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