AspenTech Integration And Tariff Mitigation Will Secure Efficiency

Key Takeaways

• Integration of AspenTech with targeted cost synergies is anticipated to enhance margins and modestly boost earnings.
  
• Strategic investments and tariff strategies are positioned to support robust growth in key sectors and protect margins.
  
• Current tariffs and muted sales recovery in key regions could pressure margins, while success depends on mitigating integration and market risks.

Catalysts

A technology and software company, provides various solutions in the Americas, Asia, the Middle East, Africa, and Europe.

• Emerson's decision to fully integrate AspenTech and target $100 million in cost synergies by 2028 is expected to modestly accretive to adjusted EPS in 2025, improving net margins through corporate cost harmonization.
  
• Emerson's sustained global investment in process and hybrid markets, particularly in LNG, life sciences, and power, is expected to drive mid-single-digit growth in process and hybrid sales in the second half, enhancing revenue.
  
• The discrete sector is projected to recover, with high single-digit underlying sales growth expected, driven by strength in Test & Measurement and potential recoveries in semiconductor demand, which would support revenue and earnings.
  
• Incremental tariff mitigation strategies, including surcharges and regionalization of supply chains, are set to fully offset a potential $245 million gross tariff impact in 2025, aiming to protect operating margins and earnings.
  
• The completed portfolio transformation and focus on strategic bolt-on M&A alongside disciplined capital allocation are expected to result in efficient capital deployment, enhancing long-term earnings growth and reinforcing EPS through potential share buybacks.

Emerson Electric Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Emerson Electric's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.6% today to 15.6% in 3 years time.
• Analysts expect earnings to reach $3.2 billion (and earnings per share of $5.81) by about May 2028, up from $2.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.2x on those 2028 earnings, down from 29.7x today. This future PE is greater than the current PE for the US Electrical industry at 21.9x.
• Analysts expect the number of shares outstanding to decline by 1.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.93%, as per the Simply Wall St company report.

Emerson Electric Future Earnings Per Share Growth

Risks

• The current tariff situation, including U.S. imports and China's retaliatory tariffs, poses a risk that could create significant cost pressures despite mitigation efforts, potentially impacting net margins and earnings.
  
• There is muted sales recovery in key areas such as factory automation, automotive, and specific regions like China and Europe, which could slow revenue growth.
  
• Potential weaknesses in the Safety & Productivity business, as contributions are limited due to continued softness in construction markets, may impact revenue and profitability.
  
• AspenTech's integration, though expected to be accretive, depends on achieving cost synergies and maintaining double-digit growth, which carries execution risk and could impact earnings if not realized.
  
• The company is exposed to risks in discrete businesses, particularly automotive and semiconductor markets, where recovery appears uncertain, possibly affecting revenue and net income.

Valuation

• The analysts have a consensus price target of $131.323 for Emerson Electric based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $168.0, and the most bearish reporting a price target of just $99.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $20.2 billion, earnings will come to $3.2 billion, and it would be trading on a PE ratio of 28.2x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $107.27, the analyst price target of $131.32 is 18.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.