Emerson Electric Upgraded As M&A Pursuit Ends

Emerson Electric Co. EMR confirmed Tuesday it has withdrawn its offer to acquire smaller rival Rockwell Automation ROK after boosting its initial offer of $200 per share in August to $225 per share.

The Analyst

Cowen's Gautam Khanna upgraded Emerson's stock rating from Market Perform to Outperform with a price target raised from $61 to $71.

The Thesis

Emerson's decision to scrap its hostile takeover of Rockwell is a positive move, as the acquisition would have generated "mediocre" returns for years, Khanna said in the upgrade note. (See Khanna's track record here.) 

The acquisition also implied a "steep opportunity cost" as opposed to other lower risk alternatives, including a stock buyback program — which offers "almost no risk" and a potential for higher returns, the analyst said. 

Emerson also signaled a desire to shift toward a "more conservative capital allocation strategy" given the announcement of a $1 billion front-loaded share repurchase program, the analyst said.

Emerson now needs to regain investor trust after the Rockwell "saga," although management's "back to basics message appears credible," Khanna said.

Emerson will likely see accelerating organic growth in fiscal 2018, as evidenced by recent order trends in the Automation Solutions segment, Khanna said. Company-wide orders have been positive since March, which implies management is well-positioned to oversee an organic upturn, he said. 

The stock's valuation of 11.4x the analyst's fiscal 2019 EV/EBITDA is "not extreme" given expectations for a 8 percent EPS growth and a history of dividend increases dating back more than six decades, Khanna said.

The sentiment moving forward has room to improve, especially from Wall Street, as only five of the 25 sell-side firms that cover the stock rate the company with a "Buy," according to Cowen. The company's 31 percent tax rate implies it will see benefits from President Donald Trump's proposed tax changes, the analyst said. 

Price Action

Shares of Emerson were trading higher by more than 3 percent at the time of publication Tuesday.

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