February 23, 2015

Emerson Electric Co.

(EMR-NYSE)

Current Recommendation

UNDERPERFORM

Prior Recommendation

Neutral

Date of Last Change

02/23/2015

Current Price (02/20/15)

$58.67

Target Price

$53.00

SUMMARY We are downgrading our long-term recommendation on Emerson to Underperform from Neutral, after the company s sluggish first quarter fiscal 2015 results. Although quarterly earnings managed to surpass the Zacks Consensus Estimate, revenues fell behind. Weaknesses in Europe and the emerging markets, along with the negative impact of currency fluctuations, continue to affect Emerson s financials. Other challenges include volatility in the upstream oil & gas market. Emerson anticipates such factors to persist in the remaining quarters of fiscal 2015. The decline in oil prices will be felt primarily in the second half of fiscal 2015. Given these factors, we expect the company s bottom-line growth to remain restrained in the coming quarters.

SUMMARY DATA 52-Week High 52-Week Low One-Year Return (%) Beta Average Daily Volume (sh)

$69.50 $56.23 -4.29 1.32 6,873,099

Shares Outstanding (mil) Market Capitalization ($mil) Short Interest Ratio (days) Institutional Ownership (%) Insider Ownership (%)

685 $40,189 5.82 73 1

Annual Cash Dividend Dividend Yield (%) 5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%)

$1.88 3.20

3.3 9.3 7.1

P/E using TTM EPS

15.1

P/E using 2015 Estimate

15.5

P/E using 2016 Estimate

14.7

Zacks Rank *: Short Term 1 3 months outlook

4 - Sell

Below Avg.,

Risk Level * Type of Stock Industry Zacks Industry Rank *

Large-Growth Mach-Electrical 179 out of 267

ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $)

2013 2014 2015 2016

Q1

Q2

Q3

Q4

Year

(Dec)

(Mar)

(Jun)

(Sep)

(Sep)

5,553 A

5,960 A

6,344 A

6,812 A

24,669 A

5,606 A

5,812 A

6,312 A

6,807 A

24,537 A

5,587 A

5,672 E

6,149 E

6,592 E

24,000 E 24,206 E

Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses)

Q1 (Dec)

2013 2014 2015 2016

Q2 (Mar)

Q3 (Jun)

Q4 (Sep)

Year (Sep)

$0.62 A

$0.77 A

$0.97 A

$1.18 A

$3.54 A

$0.67 A

$0.80 A

$1.03 A

$1.30 A

$3.80 A

$0.75 A

$0.80 E

$1.01 E

$1.23 E

$3.79 E $3.98 E

Projected EPS Growth - Next 5 Years %

* Definition / Disclosure on last page

© 2015 Zacks Investment Research, All Rights reserved.

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10 S. Riverside Plaza, Chicago IL 60606

8

OVERVIEW Emerson Electric Company is a diversified global manufacturing and technology company. It offers a wide range of products and services in the areas of process management, climate technologies, network power, storage solutions, professional tools, appliance solutions, motor technologies, and industrial automation. The company organizes its business into five operating segments: Process Management provides intelligent control systems and software, measurement instruments, valves, and industry expertise. Network Power provides power backup systems, embedded power, precision cooling, and connectivity technologies for data centers, telecommunications networks, and other applications. Industrial Automation manufactures fluid automation systems, materials joining equipment, mechanical and electrical drives, industrial electrical products, and power generation technologies. Climate Technologies provides heating, air conditioning, and refrigeration solutions. Commercial & Residential Solutions provides construction and facility maintenance tools and storage systems for diverse sectors like infrastructure, healthcare and environment.

REASONS TO SELL Emerson s operations are spread across the world, majority of which are outside the United States. Therefore, they are more prone to global economic and political risks. The weaknesses in Europe, due to a slow recovery process after the last crisis, as well as other emerging markets continue to affect the company s financials. These macroeconomic conditions are impacting the levels of capital invested in the business and a significant portion of Emerson s revenues is generated by the infrastructure related end markets, which are depended on the capital investment and credit situation in the market. Emerson s first quarter revenues across all segments were significantly impacted by the economic uncertainties in the regions. Moreover, the company has a bearish outlook for the fiscal 2015 and anticipates these uncertainties to persist in the year ahead. Also, Emerson s results of operations have been negatively affected by currency fluctuations. In the first quarter fiscal 2015, around 3% of revenues of Emerson declined due to negative impact of currency translations. Also, strengthening of the U.S. dollar continues to be a major concern, which is projected to weigh on the quarterly earnings in coming quarters as well. Emerson s business is being affected by the current volatility in the upstream oil and gas market, with oversupply continuing to pressure the prices and spending levels. This is negatively affecting the company s order rates in power generating alternators. Although the effect of this is currently low on Emerson s earnings, the company projects it to primarily weigh on the financials in the second half of fiscal 2015. In addition, Emerson is undertaking restructuring and repositioning initiatives to combat impacts due to global economic meltdown and, as a consequence, restructuring charges are negatively impacting net earnings. In the first quarter of fiscal 2015, the divesture lowered total revenues by almost 3%. In Jan 2015, Emerson closed its previously announced sale of Power Transmission Solutions. Also, going

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forward, the company anticipated fiscal 2015 earnings to be impacted by restructuring costs of $0.05 per share.

RISKS Emerson is likely to benefit from the strong market conditions of Americas. In the first quarter of fiscal 2015, the company registered significant growth across its all business lines aided by rising demand in North America. The company reaped 8% increase in underlying sales in U.S. With foreign markets still a concern for the company s results, North America is projected to help it to sail over the tides, going forward. Also, Emerson engages in mergers and acquisitions to tap growth opportunities. This is likely to influence it to grow its business and help it gain access to new technologies and markets across geographies. Emerson Electric has been generating strong free cash flow for the last few quarters. In first quarter 2015, Emerson generated a yearly increase of 17% in operating cash flow. Further, the company has issued an encouraging outlook of generating cash flow worth $3.7 billion in fiscal 2015. Apart from this, Emerson is dedicated to enhancing its shareholders wealth and has returned around $518 million via share buybacks in the quarter under review.

RECENT NEWS Emerson Q1 Earnings Beat on Strong Margins, Revenues Dip

Feb 3, 2014

Emerson Electric reported first-quarter fiscal 2015 earnings per share of $0.75 per share, which beat the Zacks Consensus Estimate of $0.73 by 2.7%, and the year-ago quarter figure of $0.65 by 15%. Earnings benefited from solid margin growth, favorable corporate expenses comparison and currency translations. Quarter in Details Total revenue decreased 0.3% year over year to $5,587 million and missed the Zacks Consensus Estimate of $5,606 million. However, underlying sales in the quarter increased 6%, offset by divestitures and unfavorable currency translation. As per the segments, Process Management segment revenues grew 3%, with underlying sales up 6%, attributable to continued strength orders and solid backlog levels. The Industrial Automation segment reported flat year-over-year revenues, with underlying sales increase of 4% due to the unfavorable currency translation impact. Revenues in the Network Power segment contracted 14%, with rise of 1% in underlying sales, owing to negative impact of divestitures and currency translations. Revenues in the Climate Technologies segment expanded 15% in the quarter, with a 17% increase in underlying sales, aided by strength in residential air conditioning business. Commercial & Residential Solutions sales grew 3%, with rise of 4% in underlying sales, driven by strong U.S. market conditions. In the first quarter of fiscal 2015, gross profit margin expanded 90 basis points to 40.8%, with strong improvement in the segments margin. Liquidity & Cash Flow Exiting the quarter, the company had cash and cash equivalents of $3.1 billion with long-term debt of $3.3 billion. Meanwhile, net cash from operating activities totaled $571 million. Equity Research

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2015 Outlook Revised Emerson Electric revised its underlying sales growth guidance and now expects it to be in the range of 3% and 5% in fiscal 2015 (prior range being 4% 5%).

VALUATION EMR s current trailing 12-month earnings multiple is 15.1x, lower than 19.6x average for the peer group and 19.3x for the S&P 500. Over the last five years, the company s shares have traded in the range of 12.8x to 22.4x trailing 12-month earnings. We changed our long-term recommendation to Underperform on the stock as we expect it to perform below the broader market. Our target price of $53.00 or 14.0x 2015 EPS.

Key Indicators

Est. 5-Yr EPS Gr%

P/CF (TTM)

P/E 5-Yr High (TTM)

P/E (TTM)

P/E 5-Yr Low (TTM)

P/E F1

P/E F2

Emerson Electric Co. (EMR)

15.5

14.7

8.1

10.3

15.1

22.4

12.8

Industry Average S&P 500

17.6 16.7

18.9 15.6

13.9 10.7

14.9 15.3

19.6 19.3

28.9 19.4

9.7 12.0

22.2 N/A 26.5 20.6

11.1 N/A 9.4 17.0

ABB Ltd (ABB) 17.4 15.3 9.1 11.8 18.0 Chapeau Inc. (CPEU) N/A N/A N/A N/A N/A Eaton Corporation plc (ETN) 14.7 13.4 9.3 11.5 15.4 Murata Manufacturing Co., Ltd. (MRAAY) N/A N/A N/A N/A 17.6 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr.

P/B 5-Yr High

P/B 5-Yr Low

ROE (TTM)

D/E Last Qtr.

Div Yield Last Qtr.

Emerson Electric Co. (EMR)

3.9

4.6

2.9

25.3

0.3

3.3

8.3

Industry Average S&P 500

2.3 5.3

2.3 9.8

2.3 3.2

-3.0 25.5

0.3

0.8 2.1

8.2

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EV/EBITDA (TTM)

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Earnings Surprise and Estimate Revision History

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DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of EMR. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1138 companies covered: Outperform - 16.3%, Neutral - 77.2%, Underperform 6.2%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each th stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.

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