On Tuesday, JPMorgan reiterated its neutral rating on Emerson (NYSE:EMR) shares, maintaining a price target of $135.00. The analyst noted that Emerson's results surpassed expectations, with hardware business sales driving margin outperformance and robust free cash flow.
Orders matched guidance at 2%, and while the backlog decreased to $7.16 billion from $7.4 billion in the second quarter, the sales funnel increased to $11.2 billion, up from $11 billion previously. Wins in the third quarter amounted to $400 million, compared to $350 million in the prior quarter.
The company's guidance was more optimistic than anticipated, with 3-5% organic growth exceeding the analyst's 2% forecast. This improvement is attributed to a more favorable end market outlook in process/hybrid sectors, as well as an expected recovery in discrete markets during the second half of the year, which have shown signs of bottoming. Moreover, test and measurement (T&M) revenues saw a modest increase.
Emerson's margin leverage is in the mid-40s, with the analyst expecting over 50% due to T&M synergies. Despite facing approximately $0.13 in headwinds, these are largely counterbalanced by $0.10 from buybacks and approximately $0.08 in tailwinds from higher-than-anticipated AspenTech (AZPN) earnings per share (EPS).
While the first quarter is projected to start slower with 2-3% growth, Emerson's earnings per share (EPS) guidance is above market expectations, although free cash flow is slightly below projections.
The integration of AspenTech is expected to be earnings-neutral, considering synergies, which is more favorable than the analyst's initial expectation. Questions remain regarding the timing of the divestiture of the company's S&P segment, which contributes about $0.48 to the EPS. The company's financial strategy aims to end the year with less than 2x pro forma leverage for all transactions.
In conclusion, despite a challenging economic environment, Emerson's strong performance and relatively low valuation contributed to a positive market reaction. The main point of interest moving forward is the basis for Emerson's confidence in an acceleration of growth in the second half of the year, particularly given the mixed signals regarding capital budgets and order trends.
In other recent news, Emerson Electric has proposed a $15.1 billion acquisition of the remaining shares in Aspen Technology (NASDAQ:AZPN), a move aligned with its increased focus on industrial automation. The company, which already holds a 55% stake in AspenTech, will need to spend an estimated $6.53 billion to finalize the acquisition. This proposal is subject to approval from a special committee appointed by AspenTech.
Meanwhile, Emerson has also announced plans to repurchase approximately $2.0 billion of its common stock in fiscal year 2025, with an expected completion of half this amount within the first quarter. The company's fiscal 2025 profit per share is projected to range between $5.85 to $6.05.
Analysts at Citi have maintained a Buy rating on Emerson, while Stephens downgraded the company's shares from Overweight to Equal Weight due to potential impacts of the Aspen Technology acquisition.
Morgan Stanley (NYSE:MS), however, reiterated its Underweight rating on Emerson, expressing concerns over potential revisions due to forecasted organic growth. KeyBanc maintained its Overweight rating with a price target of $125. These ratings reflect the recent developments in Emerson's business strategy and financial performance.
InvestingPro Insights
Emerson's recent performance, as highlighted in the article, aligns with several key metrics and insights from InvestingPro. The company's impressive gross profit margin of 51.62% for the last twelve months as of Q3 2024 underscores its strong financial position and operational efficiency. This robust margin supports the analyst's observation of Emerson's margin outperformance driven by hardware business sales.
Furthermore, Emerson's revenue growth of 13.34% over the same period reinforces the company's positive guidance and the analyst's optimistic outlook on organic growth. This growth trajectory is particularly noteworthy given the challenging economic environment mentioned in the article.
InvestingPro Tips reveal that Emerson has raised its dividend for 53 consecutive years, demonstrating a long-term commitment to shareholder value. This consistent dividend growth, coupled with the company's profitability over the last twelve months, aligns with the article's discussion on Emerson's strong financial performance and cash flow generation.
For investors seeking a more comprehensive analysis, InvestingPro offers 6 additional tips that could provide further insights into Emerson's market position and future prospects.
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