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June 23, 2009 – Comments (1) | RELATED TICKERS: EMR

Linked here is a detailed quantitative analysis of Emerson Electric Co. (EMR). Below are some highlights from the above linked analysis:

Company Description: Emerson Electric Co. primarily makes backup power equipment for telecom and Internet providers and users, climate control components, and electric motors.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price

2. 20-Year DCF Price

3. Avg. P/E Price

4. Graham Number

EMR is trading at a discount to 1.) and 3.) above. If I exclude the high and low valuations and average the remaining two, EMR is trading at a 8.6% discount. EMR earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:

1. Rolling 4-yr Div. > 15%

2. Dividend Growth Rate

3. Years of Div. Growth

4. 1-Yr. > 5-Yr Growth

5. Payout 15% of avg.

EMR earned one Star in this section for 3.) above. EMR has paid a cash dividend to shareholders every year since 1947 and has increased its dividend payments for 52 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.

2. Years to > MMA

EMR earned both of the available Stars in this section. The NPV MMA Diff. of the \$4,373 is in excess of the \$2,500 minimum I look for in a stock that has increased dividends as long as EMR has. If EMR grows its dividend at 6.4% per year, it will take 3 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.06%. EMR earned a Star since its Years to >MMA of 3 is less than 5 years.

Other: EMR is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. Several of EMR's major end-markets are highly cyclical, but it is in a strong competitive position in most major product categories. Near-term EMR will likely experience soft end-market demand. However, the company's strong balance sheet and free cash flow should sustain them through the downturn. Long-term EMR should see continued organic revenue growth from international sales, new product introductions and bolt-on acquisitions. EMR's Risks include weak global economic growth and value-diminishing acquisitions.

Conclusion: EMR earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of four Stars. This quantitatively ranks EMR as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to \$38.34 before EMR's NPV MMA Differential fell to the \$3,000 that I like to see for a stock with 52 consecutive years of dividend increases. At that price the stock would yield 3.44%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed \$3,000 NPV MMA Differential, the calculated rate is 5.2%. This dividend growth rate is below the 6.4% used in this analysis, thus providing a margin of safety. EMR has a risk rating of 1.50 which classifies it as a low risk stock.

EMR was last reviewed in November 2008. Then it received a 3-Star rating. The difference between then and now is a higher calculated estimate of the dividend growth rate and a lower estimated 20 year MMA rate. EMR is trading below its buy price of \$38.34. However, due to the current economic situation I believe there will be opportunities to initiate a position at a lower level. For additional information, including the stock's dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in EMR (0.0% of my Income Portfolio).

What are your thoughts on EMR?

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TAGS: EMR

#1) On June 23, 2009 at 10:28 AM, amassafortune (29.15) wrote:

EMR was the first individual stock I bought in 1983. I kept accumulating until its growth affected my diversification goals. Every year, I sell some. This year (2008 tax yr), the sales price-to-cost basis gain was 2,300% - a 23-bagger.

With the demise of GM, there have been articles that there are no widows and orphans stocks left, but EMR still qualifies. Emerson is on their second CEO since 1975. Their consistent plan to be in business segments where they are either #1 or #2, and the movement into engineering-based growth areas, indicates the amazing track record is likely to continue.

Chart EMR against the S&P. In Yahoo, just hit "max" for the timeframe comparison. In weak years, EMR will dip down to match performance of the S&P, but few stocks have consistently beaten the S&P like Emerson.

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