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Emerson Electric is the undisputed powerhouse in process manufacturing on the west side of the Atlantic. Despite near-term headwinds in fiscal 2020 given low levels of gross fixed investment amid geopolitical uncertainty and COVID-19-related disruptions, Emerson is poised for several years of positive organic growth after a slow recovery in early 2021.

Emerson's total addressable automation market, both served and unserved, totals over $200 billion, of which approximately 59% is in hardware and services, 32% in control product software, and 9% in standalone software. Even as Emerson holds either first or second share in a variety of product categories, share from established firms remains somewhat fragmented (depending on the category, Emerson holds roughly mid-teens market share), suggesting a large runway for growth.

Properly applied, automation can add more to manufacturing firms’ bottom line than any other investment. Additionally, predictive analytics will augment these results given the mission-critical nature of manufacturing services. Emerson will benefit from fewer available experts than can adequately address in-demand automation services; industrywide share of mind as evidenced by a multitude of awards from various trade publications; and most importantly, its large installed base, which allows Emerson to benefit from decades of higher-margin aftermarket revenue.

Former Emerson CEO Dave Farr previously maintained that the firm would hold onto its commercial and residential solutions platform until his retirement. Now that Farr has relinquished the CEO and chair roles, it is expected that CEO Lal Karsanbhai and the board will revisit a potential breakup once the firm approaches its 2022 investor day in November. The separation of Emerson's two platforms could free each business to determine its own investments and improve its earning power, which is now a more likely scenario following the acquisition of Aspen-Tech. This could also be an important catalyst to close Emerson's price-value gap.

Opportunities:

• Emerson Electric is the undisputed king of process automation with the industry’s largest installed base in the Americas.
• The market fails to appreciate the upside in Emerson's cold chain business given the opportunity to distribute COVID-19 vaccines.
• A review of Emerson's sum-of-the-parts value reveals that a breakup could unlock further shareholder value.