Gotta love the way companies interpret Reg FD. Take Emerson Electric (EMR:NYSE - news). (Please!) On Monday, just a few weeks after reporting record earnings, Emerson filed with the SEC what has now turned into a monthly 8-K (its "Regulation FD disclosure") showing orders for each of its divisions for 13 months.
Everything was fine, fine, fine -- until you got to the fast-growing Electronics and Telecom unit, Emerson's new pride and joy. The order-growth rate actually fell! The company cited order cancellations "that were placed in 2000."
But not to worry, kids, backlogs of orders were still up 30% from year-ago dollar levels, thanks to large power systems and precision air conditioning systems. What's more, "sales expectations for the year remain solid." Solid? What does solid mean? And why doesn't the company issue simultaneous press releases with these order numbers? And (this is the important question), why is the stock up since the disclosure? (Maybe nobody, or very few somebodys, saw it?!)
Cancellation of technology-related orders, regardless of backlogs, is serious news at Emerson, which is trying to distance itself from its stodgy old image. In December, it changed its logo for the first time since 1967, and dropped "Electric" from its name for corporate branding purposes "to reflect technology leadership, growth strategies and customer focus." Part of that focus has been acquisitions and divestitures, as Emerson has been reshaping itself into a more tech-savvy company. In the past two years, in fact, Electronics and Telecom grew to 27% of revenue from 14%, while it zoomed to 27% of pretax earnings from 9%.
But over the past year, as the company has spent to make acquisitions, total debt has climbed 36.3% while free cash flow has fallen 28%. Last quarter, after paying dividends, free cash flow actually went negative by $37.2 million. "At this time," says Aaron Edelheit of Sabre Value Management, "you have to wonder what the upside is." Edelheit, who is short Emerson, actually started his research on the company in hopes of buying it. But the more he looked at the balance sheet and accompanying fundamentals, the more concerned he got. Here, after all, is a company that trades at 20 times trailing earnings, with sales growth of just 10% and operating earnings growth, slightly better, at 14.5%.
The bright spot is the company's process control biz, which is being helped by oil and gas spending. "But oil and gas doesn't get the multiples Emerson gets," Edelheit says.
Wall Street, meanwhile, loves Emerson. (And why wouldn't it, with so much acquisition/divestiture/likely capital raising needs?!) The clear attraction has been Electronics and Telecom. But right now that biz is slowing -- not just for Emerson, but for competitors like Power-One (PWER:Nasdaq - news), Tyco Electronics and American Power Conversion (APCC:Nasdaq - news), which have all warned of slowdowns.
Why should Emerson be any different? Because, according to a spokesman, Emerson isn't like those other companies, because its product lines are much broader. Its tech order backlogs are lower than they had been, he adds, but the company hasn't changed its guidance. And despite order cancellation, the company is "still seeing a level of new order activity." What about falling cash flow? One quarter, which has historically been its lowest cash-flow quarter, doesn't make a trend, the spokesman says. And as for the company's price-to-earnings multiple, he says Emerson has historically had a higher multiple than its peers.
Maybe so, but it also hasn't been this heavy in tech before, and this much is clear: If you intend to live by the tech sword (and enjoy the upswings), you must also be prepared to die by the tech sword (and take your hits).
Whole Foods follies: Whole Foods (WFMI:Nasdaq - news) didn't formally announce it, but its president, Chris Hitt, is taking a six-month leave; scuttlebutt inside the company is that he won't return. His departure is the latest through the company's rapidly turning revolving door, which has helped push through the retirement of the president of the West Coast division, and the resignation of its head of purchasing and head of marketing. The company has also had four folks in charge of information technology in three years. Hitt, meanwhile, replaced Peter Roy, who left three years ago. Whole Foods officials couldn't be reached.
Cisco alert: If you missed Tuesday's Columnist Conversation, you missed my blurb that Morgan Stanley analyst Chris Stix had started chatting down Cisco (CSCO:Nasdaq - news), saying he may have to take numbers down. Heard from readers who said they couldn't find anything about that from their Morgan Stanley salesmen. (Which is why it pays to read RealMoney!) Later heard from some readers who said that after digging, they heard the same thing from their Morgan Stanley salesmen. Stix didn't return my call. |
