Energy Security And LNG Projects Will Drive Future Automation Technology Demand

Key Takeaways

• Portfolio transformation through acquisitions like AspenTech is expected to boost earnings and operational performance via synergies and operating leverage.
  
• Strong automation demand and LNG project opportunities could enhance future revenue, while innovation might improve margins through high-value products.
  
• Global economic uncertainty, tariffs, supply chain disruptions, and elongated sales cycles pose risks to Emerson's revenue, margins, and cash flow predictability.

Catalysts

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

• Emerson expects growth in automation technology demand driven by investment in energy security, near-shoring initiatives, and energy transition commitments, which could positively impact future revenue.
  
• A significant step forward in portfolio transformation includes the acquisition of AspenTech, anticipated to enhance earnings and operational performance through increased operating leverage and synergies.
  
• Substantial opportunities in LNG projects worldwide are expected to lead to over $1 billion in orders, which could significantly contribute to future revenue.
  
• Robust innovation and product recognition, including the DeltaV Edge environment and industrial IoT solutions, are expected to drive increased demand and potentially improve net margins through higher-value offerings.
  
• Ongoing strong free cash flow and substantial share repurchase plans could lead to a significant increase in earnings per share over time as the company returns approximately $3.2 billion to shareholders.

Emerson Electric Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Emerson Electric's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.6% today to 16.9% in 3 years time.
• Analysts expect earnings to reach $3.4 billion (and earnings per share of $5.61) by about March 2028, up from $2.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $3.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.9x on those 2028 earnings, down from 32.0x today. This future PE is greater than the current PE for the US Electrical industry at 24.4x.
• 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 7.98%, as per the Simply Wall St company report.

Emerson Electric Future Earnings Per Share Growth

Risks

• The uncertainty around the global economy, particularly in China where demand remains muted and growth is unclear, could impact Emerson's future revenues, especially given its exposure to chemical and discrete markets in the region.
  
• The potential impact of tariffs and supply chain disruptions, specifically involving Mexico, pose a risk to Emerson's cost structure and could negatively affect net margins if price surcharges aren’t sufficient to cover increased costs.
  
• The slowdown in Emerson's discrete businesses, including manufacturing and automotive, could hinder growth as they face continued softness, potentially impacting overall revenue and earnings in the short term.
  
• The volatility in foreign exchange rates presents a financial risk, as it has already created headwinds impacting net sales and could lead to further unpredictability in net margins and earnings moving forward.
  
• The elongation and complexity of sales cycles for large-scale projects, such as LNG and power generation, could delay revenue recognition and the conversion of orders to backlog, affecting cash flow and revenue predictability.

Valuation

• The analysts have a consensus price target of $140.726 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 $110.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $20.3 billion, earnings will come to $3.4 billion, and it would be trading on a PE ratio of 27.9x, assuming you use a discount rate of 8.0%.
• Given the current share price of $115.3, the analyst price target of $140.73 is 18.1% 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.