This Electrical Equipment Maker Is Poised For A Turnaround, According To Morgan Stanley

According to Morgan Stanley, investors should consider Emerson Electric as a potential investment while they await clarity regarding its acquisition plan and how it will be impacted by the Inflation Reduction Act.

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Pokrzywinski's new price target implies a 16.7% upside over where the stock ended Monday's session, reflecting an upgrade from equal weight to overweight and a $1 increase from his previous price target of $50. The fresh price target implies a 16.7% upside from the stock's closing price on Monday.

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In Pokrzywinski's analysis of Morgan Stanley's new risk-adjusted return framework, the company offers the best risk-reward potential in its coverage universe.

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As a risk-adjusted risk-to-reward name in our coverage lacking material non-resi exposure, EMR is among the names with the strongest risk/reward ratio, he added in a note to clients on Tuesday.

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Since the bid was made to buy National Instruments in January, the stock has underperformed in the broader market. Despite the fact that the offer represented a 32% premium to National Instruments' closing price on Jan. 12, the price of the stock is still relatively low. As Emerson said, it is also an improvement from the initial offer of $48 per share it made earlier this year.

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Pokrowinski has said that the resolution of the likely approval of the bid, paired with the possibility of walking away as an alternative, is a “win-win.” Whether the company decides to make the purchase or not, he said, it is likely to prove its dominance by making the purchase or if the costs become too high, it will show its discipline.

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As the peer group sees either a deceleration or a straight decline in orders, Pokrzywinski believes the potential acquisition comes as orders are expected to accelerate. In the next few months, there is also the possibility that orders could come with more clarification regarding the limits of the Inflation Reduction Act.

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According to him, hydrogen and liquefied natural gas could generate a compound annual revenue growth rate of 2% by 2030 for the company, which will be the company’s highest-ever revenue growth. Nevertheless, in the short run, there is not much evidence that anything is changing, with the consensus revenue growth outlook for 2024 being similar to the company’s average over the past decade.

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It is Pokrzywinski's belief that the business cycle was a contributing factor to the highest growth rate for Emerson's backlog last quarter. While he said that the company would continue to focus on new business models that will require capital expenditures to develop, he said the change in capital expenditures would not be a real threat to meeting consensus expectations in the near future.

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Compared to the S&P 500, Emerson shares have lost nearly 3% year-to-date, while the Dow Jones Industrial Average is up nearly 2%.