March 8, 2016

Adjusted Valuations Reveal Emerson Electric’s True Value


Summary

  • Using Adjusted Earnings, EMR’s Adjusted Return on Assets is 18% in 2015 – significantly higher than the traditional 10% ROA most financial databases report.
  • One culprit behind this major distortion is EMR’s $6.7bn goodwill that inflates the company’s assets, leading to a significant distortion of the firm’s economic reality under GAAP.
  • Also of note is the difference between the firm’s Forward Adjusted Value-to-Earnings ratio of 20.9x versus their traditional 13.7x forward P/E.

2016 03 03

Performance and Valuation Prime™ Chart

Under GAAP, as-reported financial statements and financial ratios of EMR do not reflect economic reality. The traditional return on assets computation understates the company’s profitability by incorrectly including certain items. The distortion of both profitability measures and valuation metrics of EMR are driven by the inclusion of goodwill ($6.7bn), which inflates the firm’s assets, and by incorrectly expensing items like R&D ($506mn) and operating leases ($391mn) rather than treating them as part of the company’s investments.

After adjusting for similar issues and a host of other GAAP-based miscategorizations, Valens calculates EMR’s Adjusted Return on Assets as 18% in 2015. In contrast, most financial databases show a traditional ROA of only 10%. The profitability of EMR’s operations and their equity’s true value are therefore not what traditional metrics originally suggest.


Click here to read the article in its entirety at Seeking Alpha.