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Morningstar | While Emerson's Sales Slowed in the 2Q, We Believe Our Long-Term Thesis Remains Intact

In our view, Emerson Electric is the undisputed powerhouse in process manufacturing on the left side of the Atlantic. After a series of capital allocation missteps several years ago and a burgeoning recovery from declining oil prices, we believe Emerson is poised for several years of positive organic growth. According to 2017 data, the total addressable automation market, both served and unserved, amounts to $204 billion, including approximately $140 billion in devices, $40 billion in control and safety systems, and $20 billion in asset management. Even as Emerson is one of the more established players in automation, it only has 6%, 5%, and 2% share participation in each respective category, suggesting a large runway for growth. Properly applied, we believe automation can add more to manufacturing firms’ bottom line than any other investment. Additionally, we think predictive analytics will augment these results given the mission critical nature of manufacturing services--particularly in process manufacturing given catastrophic risk of failure in Emerson’s end markets’ plant facilities. We believe Emerson will benefit from: 1) fewer available experts than can adequately address these in-demand automation services; 2) industrywide share of mind as indicated by a multitude of awards from various trade publications; and 3) most importantly, at $100 billion, the industry’s largest installed base. Automation is a capital-intensive business that requires continuous reinvestment to meet growth targets. As such, we believe Emerson’s management will hold on to its commercial and residential solutions platform, which houses both climate technologies and tools and products, until at least 2021. While these segments translate to comparably fewer growth opportunities and bear little strategic relevance to the firm’s automation business, they provide the firm with a reliable source of high returns on capital. We think the cash flows from Emerson’s rich pedigree of household-name brands ultimately go to support the firm’s dividend, which continues growing in an upwards fashion for over 60 years. We expect this to continue during the length of our explicit forecast.