Emerson Electric: Charging Toward The Buy Zone

Key Points

• Emerson Electric is falling like a bolt of lightning but may hit bottom soon. 
• The Q1 results were mixed but the outlook is steady if not favorable. 
• The 2.28% dividend is getting bigger and the value is improving. 

Emerson Electric NYSE: EMR) shares began a downtrend that was accelerated by the FQ1 results and they are heading down toward a technical buy zone. The buy zone is near the $78 level as indicated by the chart pattern unfolding before us today. We have a strong sell-off and bearish flag with a $13 magnitude.

This means the stock could and probably will fall at least $13 from the top of the flag, which is just above $90, closer to $91. 

So, $13 from $91 is $78, and $78 is, coincidentally, consistent with a bottom put in place back in mid-2022. The market is heading down to retest support at this level, which will be the signal to buy, a retest of support confirmed in the price action. Why will that level produce a signal?

Because Emerson Electric is a Dividend Aristocrat and King with a healthy business. There is no reason for shares to fall like they are, but they are so savvy that investors should take advantage of it. 

Emerson Electric Falls On Earnings? 

Emerson Electric’s decline post-earnings release may be a sign the market doesn’t want to buy stocks right now. The company missed on the top and bottom lines but the misses are slim and offset by non-cash mark-to-market adjustments in the retirement accounts.

That aside, the company reported $3.7 billion in net revenue for a gain of 6.6% over last year. The gains come on a 6% increase in core sales compounded by acquisitions. On a segment basis, the strength was all in the Americas as EU sales declined by 2% and AMEA came in flat. 

The company’s GAAP EBITDA margin contracted by 1700 basis points, but that is due to the mark-to-market accounting adjustment. The company’s adjusted EBITDA margin expanded by more than 100 basis points and drove solid results on the bottom line. The GAAP earnings fell by 50% due to 1-off events in the prior year, while the adjusted earnings fell by 1%.

The adjusted earnings also missed the consensus estimate, but the miss and decline are more than offset by the $0.09 attributed to the accounting difference. 

Looking forward, the company’s guidance is good, if not excellent and calls for growth in line with the Marketbeat.com consensus estimates. The takeaway is that guiding for growth is fine, but this growth was priced into the market, and the economic risks are as present as ever.

The silver lining is that dividend payments are still sound and should continue uninterrupted in 2023 to include the 67th consecutive dividend increase. The company also repurchased $2 billion of shares during the quarter and can be expected to continue repurchasing if not at the same pace. 

"Emerson remains committed to disciplined capital allocation and shareholder return, completing $2 billion of share repurchase in the first quarter," said CEO Lal Karsanbhai. "We continue to actively pursue opportunities to deploy capital effectively, including our proposal to acquire National Instruments (NI) for $53 per share, a unique value creation opportunity for Emerson and NI shareholders."

The Technical Outlook: Emerson Electric Falls Like A Flash Of Lighting

The price action in Emerson Electric resembles a bolt of lightning falling from the sky and this bolt should mark an entry point for investors once played. The risk now is that price action will fall below $78 but even if it does there is another support level just below.

The market for this stock won’t be in real danger unless it falls below $73 at which point a fall to the COVID lows becomes a possibility. The more likely scenario, however, is that support will be found near $78 and keep this stock range bound in 2023.