Continued adoption of advanced technologies, favorable government policies, and an increased focus on domestic production amid growing supply chain constraints worldwide should drive the growth of the industrial sector. The global industrial machinery market is expected to grow at a 3.5% CAGR from 2021 to 2027.
Emerson Electric Co. (EMR) and 3M Company (MMM) are two prominent players in the industrial space. EMR designs and manufactures electronic and electrical equipment, software, systems, and services. It offers products for industrial, commercial, and consumer markets worldwide through its network power, process management, industrial automation, climate technologies, and commercial and residential solutions divisions. MMM operates as a diversified technology company that operates through Safety and Industrial; Transportation and Electronics; Health Care; and Consumer segments. It offers its products through e-commerce and traditional wholesalers, retailers, jobbers, distributors, and dealers.
Year-to-date, EMR has lost 7% and MMM is has dropped 17%. Which of these stocks is a better pick now? Let’s find out.
Click here to check out our Industrial Sector Report for 2022
Latest Developments
On May 24, 2022, EMR and Toyota Australia, an Australian subsidiary of the Japanese car manufacturer Toyota Motor Corporation (TM), collaborated to transform part of Toyota Australia’s operations into commercial-grade hydrogen production, storage, and refueling plant. For the Toyota Australia Hydrogen Center, EMR’s advanced DeltaV distributed control system gathers data from the plant’s complex equipment, making it easier to monitor the production and storage of hydrogen gas and document and validate the sustainability of operations. Supported by the Australian Renewable Energy Agency (ARENA), EMR’s automation expertise helps Toyota Australia demonstrate the technical and economic feasibility of manufacturing hydrogen fuels, including the use of renewable solar energy. This should nurture EMR’s partnership with Toyota Australia in the long run.
On May 16, 2022, Robotics Business Review (RBR) named the 3M Finesse-It Robotic Paint Repair System a 2022 RBR50 Robotics Innovation Award Honoree. This system uses advanced vision system data and repairs paint defects on automobiles coming off the assembly line. This award reflects its growing reach in the robotics sector.
Recent Financial Results
EMR’s net sales for its fiscal 2022 second quarter ended March 31, 2022, increased 8.1% year-over-year to $4.79 billion. The company’s adjusted EBITA came in at $967 million, representing an 8.9% rise from the year-ago period. While its net earnings increased 18.8% year-over-year to $675 million, its adjusted EPS grew 20.6% to $1.29. As of March 31, 2022, the company had $6.93 billion in cash and equivalents.
For its fiscal 2022 first quarter ended March 31, 2022, MMM’s net sales declined 0.3% year-over-year to $8.83 billion. The company’s operating income came in at $1.64 billion, representing a 17.7% rise from the prior-year period. Its adjusted net income came in at $1.52 billion, down 11.8% from the year-ago period. MMM’s EPS came in at $575, indicating a 1.9% year-over-year decline. As of March 31, 2022, the company had $3.25 billion in cash and cash equivalents.
Past and Expected Financial Performance
Over the past three years, EMR’s net income and levered free cash flow have increased at CAGRs of 7.4% and 6.8%, respectively.
EMR’s EPS is expected to increase 22.9% year-over-year in fiscal 2022, ending September 30, 2022, and 8.3% in fiscal 2023. Its revenue is expected to grow 8.6% in fiscal 2022 and 6.1% in fiscal 2023. Analysts expect the company’s EPS to rise at a 10.3% rate per annum over the next five years.
Over the past three years, MMM’s net income and levered free cash flow have declined at CAGRs of 0.3% and 4.8%, respectively.
Analysts expect MMM’s EPS to grow 7.1% year-over-year in fiscal 2022, ending December 31, 2022, and 5.3% in fiscal 2023. Its revenue is expected to grow 1.5% year-over-year in fiscal 2022 and 3.3% in fiscal 2023. Analysts expect the company’s EPS to grow at a 6.6% rate per annum over the next five years.
Valuation
In terms of non-GAAP forward PEG, MMM is currently trading at 1.70x, 10.4% higher than EMR’s 1.54x. In terms of trailing-12-month Price-to-Book, EMR’s 4.73x compares with MMM’s 5.56x.
Profitability
MMM’s trailing-12-month revenue is 1.9 times EMR’s. MMM is also more profitable, with a 26.8% EBITDA margin versus EMR’s 21.8%.
Furthermore, MMM’s ROE, ROA, and ROTC of 38.9%, 10.1%, and 14.4% compare with EMR’s 29.1%, 7.9%, and 10.7%, respectively.
POWR Ratings
While EMR has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, MMM has an overall C grade, equating to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
Both EMR and MMM have been graded a C for Momentum, consistent with their weak price performance. EMR has lost 6.9% year-to-date, while MMM fell 17.2%.
EMR has been graded a B in terms of Sentiment, which is in sync with expected earnings growth. EMR’s EPS is expected to grow 8.4% year-over-year to $5.09 billion for the fiscal 2022 third quarter ending June 30, 2022. MMM’s C grade for Sentiment reflects its lower revenue estimated by analysts. The consensus revenue estimate of $8.91 billion for MMM’s fiscal 2022 second quarter ending June 30, 20222, represents a 0.4% decline from the prior-year period.
Of the 94 stocks in the Industrial - Equipment industry, EMR is ranked #21. In contrast, MMM is ranked #44 of 81 stocks in the Industrial - Machinery industry.
Beyond what we have stated above, our POWR Ratings system has graded EMR and MMM for Value, Quality, Stability, and Growth. Get all EMR ratings here. Also, click here to see the additional POWR Ratings for MMM.
The Winner
Increasing demand and focus on domestic production should help EMR and MMM benefit in the coming months. However, a relatively lower valuation makes EMR a better buy here.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Ratings of Buy or Strong Buy. Click here to access the top-rated stocks in the Industrial - Equipment industry and here for those in the Industrial - Machinery industry.
EMR shares were trading at $88.40 per share on Friday afternoon, up $1.80 (+2.08%). Year-to-date, EMR has declined -3.82%, versus a -12.30% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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