Automating Growth

In this edition of the Smart Investor newsletter, we examine a leading industrial automation company. But first, let us delve into the latest Portfolio news and updates.


Portfolio Stock Updates

❖ Applied Materials (AMAT) published its fiscal Q2 2024 results last week. The chip materials technology leader easily topped analysts’ revenue and EPS estimates, also lifting its guidance for the ongoing quarter. AMAT’s shareholders will also receive higher dividends, as the company recently lifted its payout by 25%.

❖ Taiwan Semiconductor Manufacturing (TSM) has also announced a dividend increase. The world’s largest chip foundry is lifting its payout by 10% starting September.

❖ Amphenol (APH) announced that its board of directors approved a two-for-one stock split, whereby each shareholder will receive one additional share for every share held on the record date, which is May 31st, 2024.

❖ General Dynamics (GD) has secured a $185 million deal to provide cybersecurity services to the U.S. Air Force.

❖ Dell Technologies (DELL) is expanding AI-related collaborations across the IT sector. Thus, on Monday, it unveiled its new product range, consisting of AI-supporting PCs featuring Snapdragon X processors made by Qualcomm (QCOM), a TipRanks’ Dividend Portfolio company. The product line includes Microsoft’s (MSFT) new product line, the Copilot+ PCs. In addition, Dell said it has launched a new line of liquid-cooled servers compatible with Nvidia’s (NVDA) breakthrough Blackwell chips. Nvidia’s CEO Jensen Huang said the company’s partnership with Dell will help generative AI technology reach a wider range of customers.

❖ Oracle (ORCL) has seen its stock surge on news that the cloud software giant is nearing a $10 billion deal with Elon Musk’s AI startup xAI, under which the latter will rent a slate of Oracle’s cloud servers over several years.

❖ American International Group (AIG) announced that it will sell about $3.8 billion worth of shares of Corbridge, a life and retirement business spun off from AIG in 2022. The holdings, representing 20% of Corebridge’s outstanding stock, will be sold to Nippon Life Insurance Company.


Portfolio Earnings and Dividend Calendar

❖ The Q1 2024 earnings season is almost over, with no Portfolio companies scheduled to report in the coming week.

❖ The ex-dividend date for Applied Materials (AMAT) is today.



New Buy: Emerson Electric Company (EMR)

Emerson Electric Company is a global technology, software, and engineering powerhouse, providing innovative solutions for customers in industrial, commercial, and residential markets. Emerson’s wide product portfolio includes measurement and analytical instrumentation, industrial valves, fluid control, pneumatic mechanisms, electrical distribution equipment, and much more. The company also provides various industrial, automation, and operations management software, as well as modernization and migration services and process automation services, among others. EMR is one of the largest industrial companies in the U.S.


History of Success

The company was founded in 1890 in St. Louis, Missouri, as a manufacturer of electric motors and fans. Over the past 130+ years, Emerson has been responsible for many well-known innovations and inventions, from household staples such as ceiling fans to various industrial-use breakthroughs. The company has grown through internal investments as well as via acquisitions, both enlarging its domestic customer base and expanding to international markets.

Today, with a market capitalization of over $65 billion and annual revenues of more than $15 billion, Emerson Electric ranks #206 on the Fortune 500 list. It has a presence on every continent, with more than 170 locations worldwide.


Capitalizing on Global Megatrends

Emerson derives 50% of its revenue from the Americas, 20% from Europe, and 30% from Asia, the Middle East, and Africa. Its end markets are highly diversified by industry, with the largest market – Energy – contributing 21% of net sales, followed by Industrials with 17%. As for reporting segments, EMR’s Intelligent Devices division (responsible for automation, measurement, and other products) provides ~70% of total revenues. The remainder is derived from the Software & Control division.

The company regularly acquires and divests parts of its business to create an optimal portfolio mix. Thus, the Software subsegment includes AspenTech, an industrial software powerhouse with double-digit earnings growth acquired by EMR in 2022. In 2023, Emerson acquired Flexim, a flow measurement technology company; Afag, a factory automation provider; and National Instruments (NI), a test and measurement automation company. On the other hand, in 2023 EMR sold the majority stake in Copeland, formerly its Climate Technologies business, which became an HVAC and refrigeration industry leader. In 2022, Emerson sold two of its non-core businesses, repositioning itself as a high-growth industrial company.

Over the last several years, the company has reduced its exposure to the Oil & Gas industry in order to gain higher revenue stability. Though significant, this is only a small part of an ongoing strategic change in which Emerson is repositioning its business mix towards software and automation (a much higher-margin business than industrial equipment). Within this realm, EMR is expected to benefit from the advance of AI technology in multiple ways, from offering AI-backed automation and control solutions to catering to the surging demand for power management software from proliferating data centers.


High Growth Target Is Being Achieved

Emerson boasts strong fundamentals, with a moderate debt-to-equity ratio that significantly decreased in the past five years. Its profitability metrics, such as ROE and ROA, are in the top 5% of its industry. Its gross, EBITDA, operating, and net profit margins strongly surpass its peer averages.

While the repositioning to higher-growth business lines is ongoing, and this has already yielded stronger-than-expected earnings growth in recent quarters. Thus, on May 8th EMR reported its results for the fiscal Q2 2024 (ended March 31st), featuring a 17% year-on-year growth in net sales. The surge in sales was mostly attributable to the company’s Software and Control division, which was boosted by the NI acquisition.

In FQ2, Emerson reported a 32% year-over-year surge in free cash flows and an adjusted EPS increase of 25%, beating even the most optimistic expectations from the Street. Moreover, a $8.8 billion backlog, about three-quarters of which is expected to be recognized as revenues over the next 12 months, hints at a consensus-beating performance in the next several quarters, as well as further market-share growth. As a result of the fiscal year’s blockbuster first half, Emerson raised its full-year sales and adjusted EPS guidance.


Total Return Outlook

Emerson’s stock has delivered an almost 40% gain in the past year, strongly outperforming the S&P 500. Of course, the company’s solid fundamentals, market strength, and great delivery haven’t gone unnoticed by investors, which has propelled the stock upwards. As a result, the stock is now quite richly valued, though so are all stocks of large-cap quality companies in the current market. However, EMR has recently edged down a little, making for a more attractive entry point. In addition, when compared to peers in the industry, the stock comes in the middle of the valuation scale for its peers. Based on future cash flows, the stock seems to be fairly valued.

Notably, stock price appreciation isn’t the only means of EMR’s shareholder compensation. Emerson is a Dividend King, having grown its dividends for 67 consecutive years. While its current dividend yield of 1.85% is not very high, given the impressive track record of payout increases, shareholders are expected to receive growing dividends for years to come.

Moreover, Emerson Electric has a long track record of reducing its outstanding shares through buybacks, both during opportune times and to offset share dilutions. The company has steadily decreased its share count by 1%-3% per year over the past two decades. EMR has a $500 million buyback authorization in place for fiscal 2024, with $175 million worth of shares repurchased during FQ1. The company hasn’t repurchased shares in the latest quarter due to the strong run-up in the stock.

Taking into account Emerson’s market dominance, optimistic growth outlook, stellar track record of shareholder compensation, as well as much better profitability, growth, and momentum metrics than those of most of its competitors, we view its valuation as moderate. This view is shared by several prominent Wall Street analysts, who see a  high double-digit upside to the stock in the next 12 months.


Investing Takeaway

Emerson Electric is an industrial automation powerhouse, capitalizing on the ongoing megatrends such as digitalization, reshoring, increasing energy efficiency, and others. Its strong balance sheet supports its ongoing strategic transformation into a high-growth company, which is already bearing fruit, with expectations for further market and margin expansion. While not value-level priced, the company’s bright outlook and shareholder alignment support a premium valuation versus its sector. Considering these factors, we believe that EMR can be a valuable addition to the Smart Investor portfolio.



New Sell: Assurant, Inc. (AIZ)

Assurant, Inc. (previously known as Fortis) is a leading global provider of non-life insurance and customized risk management solutions. The company offers a variety of products and services, including mobile device protection, vehicle protection, and renter insurance.

Assurant boasts robust financial health with a negligible net debt-to-equity ratio, as the company has been reducing its leverage over the past five years. AIZ displays strong operating performance, a favorable business profile, and appropriate enterprise risk management.

The company pays dividends, which have consistently increased for 19 years; it also performs generous buybacks. Since its IPO in 2004, the company has repurchased ~70% of its outstanding stock.

Its earnings performance has been outstanding: over the past five years, AIZ’s earnings-per-share surged at a CAGR of 25%. In the last reported quarter, the company revealed an 81% year-over-year EPS growth.

Given all these positives, as well as the fact that there was no negative news about the company, it is puzzling that Assurant’s stock has been underperforming in the past two months. The underperformance seems to be caused by investors’ fretting over a strong prior run-up in the stock and cashing out, and as this sentiment feeds itself, most of the technical indicators are flashing red, warning of further downside.

As we have seen, this market can be very punishing for smaller-cap firms, as the sentiment is strongly skewed towards large companies. We will revisit this insurance gem when market conditions change, but at the moment we believe it is appropriate to sell the stock.



Portfolio Stocks Under Review

❖ Flex (FLEX): this contract manufacturer remains under review due to the heavy insider selling of the company’s stock in the past weeks. Flex last revealed its results on May 1st, surpassing analysts’ revenue and EPS estimates for its FQ4 2024 and beating full-year EPS projections, but slightly missing on annual revenue. The company announced a restructuring plan aimed at reducing its workforce and enhancing operational efficiency.



Smart Investor’s Winners Club

*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.

The markets ebbed and flowed over recent week, but the 12 stocks in our exclusive club’s ranks remain unchanged: SMCI, GE, AVGO, ANET, EME, TSM, AMAT, ORCL, APH, GD, ITT, and PH.

However, there has been a lot of action below the 30% threshold. Stocks purchased for the Portfolio as recently as March and April – Howmet Aerospace (HWM) and Dell Technologies (DELL) – are already becoming runners-up with 28.8% and 28.4% gains since purchase, respectively. Will they close these minute gaps, or will someone else outrun them to the finish line?



Smart Investor Portfolio

 Portfolio Return YTD
Portfolio Volatility (Beta) Portfolio Dividend Yield
19.23% 1.03 0.85%


New Portfolio Additions

Ticker Date Added Current Price
EMR May 22, 24 $113.70

New Portfolio Deletions

Ticker Date Added Current Price % Change
AIZ Feb 28, 24 $171.38 -5.71%

Current Portfolio Holdings

Ticker Date Added Current Price % Change
SMCI Nov 8, 23 $898.95 +251.98%
GE Jul 27, 22 $161.00 +188.12%
AVGO Mar 22, 23 $1399.20 +121.77%
ANET Jun 21, 23 $316.99 +109.22%
EME Nov 1, 23 $388.24 +88.13%
AMAT May 31, 23 $219.80 +64.89%
TSM Aug 23, 23 $153.67 +63.84%
APH Aug 9, 23 $135.40 +53.10%
ORCL Dec 21, 22 $124.63 +52.92%
GD Dec 22, 21 $297.06 +45.79%
ITT Oct 18, 23 $139.17 +45.71%
PH Oct 11, 23 $546.87 +37.47%
HWM Apr 10, 24 $84.79 +28.76%
DELL Mar 27, 24 $147.24 +28.43%
VRTX Aug 2, 23 $442.00 +27.11%
CI Jul 12, 23 $336.38 +25.19%
AIT Dec 6, 23 $201.08 +22.06%
STLA Sep 6, 23 $22.09 +21.64%
MCK Dec 13, 23 $552.39 +19.53%
CHKP Jul 19, 23 $151.58 +19.05%
CXT Oct 25, 23 $61.06 +17.97%
TXT Nov 29, 23 $88.82 +15.49%
SNX Apr 3, 24 $127.90 +9.85%
ELV Mar 6, 24 $545.61 +9.48%
FLEX Feb 21, 24 $29.75 +7.28%
REGN Feb 7, 24 $993.95 +5.99%
AIG May 1, 24 $78.68 +4.47%
CBOE Apr 24, 24 $183.74 +2.75%
DOV May 8, 24 $186.06 +2.33%
PYPL Apr 17, 24 $64.10 +1.06%
V May 15, 24 $275.95 -0.64%
WRB Jan 31, 24 $79.23 -2.94%



What’s Next?

Our next commentary will come out on Wednesday, May 29thUntil then – we wish you a world of investment success!

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