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In Part 3, I did a quick fundamental evaluation of Siemens, Legrand, TE Connectivity and Emerson Electric. Analyzing the financial data shortlists Emerson as a likely buy for this portfolio at this point in time, while the other three go on the watch list. I am going to compare Emerson with ABB, Schneider Electric and Rockwell Automation.
Considering its comparative size and low revenue market cap multiple, I have also decided to bring Siemens to today's list as well.
Basis revenue multiple to market cap, Siemens continues to remain attractive, followed by ABB and Emerson. However, when I consider net income - I can see Emerson is ahead. That is not to say things wont get better for Siemens, but I am not convinced now is the time to add it to my portfolio. Although the stock has seen good upward momentum in the recent months.
In terms of efficiency and valuations, Emerson has the lowest PE ratio while Siemens and Rockwell are comparatively more expensive at this time. At 27%, Emerson also has a comparatively lower volatility.
Debt / Equity - Emerson has equal distribution of debt and equity in its capital structure, as does Siemens. ABB and Schneider have lower debt, while Rockwell has debt 1.5 times its equity. This is particularly important in a rising interest rate scenario.
Looking at recent trends in the financials:
Revenue Growth is dipping for Siemens, Rockwell and ABB, while it is rising for Emerson and Schneider.
Emerson has also maintained broadly consistent Operating income margins, Capex margins, inventories and interest expenses.
Free cash flow is trending upwards.
For fair value, I have looked at the Discounted Cash Flow and Discounted Dividend Method (offered by InvestingPro) and the potential upside from current levels.
Only Emerson offers a potential upside on both methods, while Siemens and Rockwell are both trading above their fair valuation. While I do understand that this assessment is based on the expected future performance of the company. It is also not necessary that a company always trades at or near its fair value. However, I think this is one way to compare stocks and make an investment decision.
At the end of this evaluation process, I intend to add Emerson to the Investment portfolio. This will be the second buy after Google (in Part 2 - from the US Megacaps).
There are other stocks in this sector that I have not considered yet such as Honeywell and Japanese companies like Fanuc and Mitsubishi Electric.. I will circle back to these stocks at a later point in time.
In the next post, I intend to evaluate Semiconductor stocks.
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