Buckingham Downgrades Emerson Electric To Sell

Emerson Electric Co. (NYSE: EMR) has plans of purchasing Pentair Plc’s (NYSE: PNR) Valves & Controls business. Buckingham Research Group’s Joshua Pokrzywinski downgraded the rating on Emerson Electric from Neutral to Underperform, while reducing the price target from $49 to $44.

Analyst Pokrzywinski believes that Emerson Electric’s purchase of Pentair's [Rated: Neutral, PT: $62] V&C business adds “definitive risk” to its earnings over the next several years. Emerson Electric’s dividend sustainability would likely be at risk.

Dilutive Purchase

The purchase dilutes the company’s portfolio quality, Pokrzywinski commented. He added, “While the assets are cyclically depressed, we believe the strategic overlap is less than ideal with EMR's Process portfolio in that V&C will not pull through the high quality DCS and instrumentation categories but could amount to bundling on standard/ commoditized valves.”

Pokrzywinski believes that the commoditized nature of about 25 percent of the V&C portfolio curtails the sales synergy opportunity and margin upside, uncles there is a substantial increase in oil prices. Moreover, this makes the initial 10 percent synergy target “appear aggressive in light of the restructuring PNR had already undertaken.”

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