'Few Catalysts Ahead' In Emerson; Credit Suisse Downgrades To Neutral

Emerson Electric Co. EMR announced plans to acquire Pentair Plc’s PNR Valves & Controls business for $3.15 billion. Credit Suisse’s Julian Mitchell downgraded the rating on Emerson from Outperform to Neutral, while maintained the price target at $57.

Analyst Mitchell commented that Emerson’s portfolio change had been “largely enacted,” and that there were only few catalysts ahead.

Deal With Pentair

The purchase of Pentair’s Valves & Controls business has “solid strategic logic,” Mitchell wrote. He added that the synergy targets did not look conservative. Emerson expects to achieve 10 percent of V&C’s Year 5 sales in synergies. While V&C’s sales are assumed to decline in 2017, they are expected to grow at a low-single digit CAGR thereafter to ~$1.8 billion.

Dearth Of Catalysts

The analyst pointed out that Emerson had already unveiled several of the anticipated strategic moves. Following the many portfolio announcements made recently by Emerson, there seemed to be a lack of upcoming catalysts. Meanwhile, the company’s shares had recorded gains year-to-date and were now trading close to the price target.

Mitchell projected Emerson to achieve overall EPS, excluding restructuring costs and deal amortization, of ~$3 in 2019. He further stated, “We do not think the implied valuation of EMR therefore looks that attractive.”

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