CEO of Emerson Electric Purchases 10,000 Shares – Insider Weekends

Emerson Electric (EMR): $88.51

Market Cap: $50.46B

Enterprise Value: $47.31B

Key Insights

• The 133 year old Emerson Electric has a lifer as CEO. Both the CEO and a long serving director purchased shares in November.
• The director is an M&A attorney who has been on the board since 2000 and last purchased shares in March 2020.
• The company allocated $2 billion to a buyback program in 2023 and has a new $500 million program for 2024.
• Selective acquisitions and divestitures such as the sale of InSinkErator to Whirlpool for $3 billion has left the company with improving margins and a big jump in EPS.
• The company has been increasing its dividend every year for 68 years and currently sports a dividend yield of 2.37%.
• Trading at about 20 times trailing free cash flow and expected mid-teen revenue growth for 2024, the company is trading at a reasonable valuation.

The crop of insider purchases this week were an eclectic mix and very different from the usual suspects like Asana (ASAN). The insider buying by the CEO and director of trucking company Heartland Express (HTLD) were interesting considering both Heartland and Old Dominion Freight Line (ODFL) are competing for Yellow’s assets in bankruptcy. We wrote about Heartland here and Old Dominion here. However the insider purchase that stood out the most to me was the industrial company Emerson Electric (EMR).

The 133 year old Emerson Electric operates varied lines of businesses ranging from building actuators to providing advanced industry and automation software. The companies serves industries like oil & gas, power generation, life sciences, medical and more. A majority of the company’s board consists of independent directors with experience in a wide range of industries.

One of the heuristic we look for when identifying ideas is insider buying by an independent director who has served on the board for a long time and has seen how the company performs during various market cycles. Emerson Electric made our list this week because of insider buying by the CEO.

While the purchase by an Emerson lifer CEO who started his career at the company more than 28 years ago was interesting, what really caught my eye was a purchase by Director Arthur Golden. Mr. Golden is a M&A lawyer who often represents companies in antitrust cases against the government. He has served on Emerson’s board since 2000 and his previous insider purchase was in March 2020 when the stock had dropped due to the quick COVID-19 related bear market. He is clearly an opportunistic buyer.

Company Transformation

Why would Mr. Golden suddenly get interested in Emerson now? The company has done a great job of transforming itself over the last three years through selective acquisitions and divestitures that has left the company with significantly higher margins and a nice growth engine. The CEO Lal Karsanbhai took the helm of the company a little less than three years ago. Adjusted EPS of $4.44 in fiscal 2023 (ending September 2023) was up 22% year-over-year and free cash flow of $2.4 billion was ahead of the company’s own guidance.

We are not big fans of adjusted numbers but in this case the adjusted numbers are a better proxy because GAAP EPS for 2023 was unusually high at $23.02. This huge EPS jump was related to a one-time gain from the sale of Emerson’s HVAC and refrigeration business to Blackstone in a transaction valued at $14 billion. Emerson received $9.7 billion upfront, $2.25 billion as a seller’s note and retained a 40% equity ownership in the business. The structure of the deal makes me wonder if Mr. Golden was closely involved in the transaction.

Following this transaction (the new HVAC company is called Copeland), Emerson had net cash on its balance sheet. After the company closed its $8.34 billion acquisition of National Instruments Corporation (NI) in October 2023, the company expected to have a net debt-to-EBITDA ratio of less than two.

Revenue in 2024 is expected to grow 13% to 15.5% with 4% to 6% coming from organic growth and the rest from acquisitions including NI, which closed in October 2023 and AspenTech, which closed earlier this year. FCF for fiscal 2024 is forecast to be between $2.6 billion and $2.7 billion

FCF for fiscal 2023 was $2.4 billion, which given the company’s enterprise value of $47.31 billion, implies the stock is trading at about 20 times trailing FCF.

A quick note about the company’s enterprise value. Most financial sites are reporting an EV of $57 billion. However once you include the cash and note from the Blackstone transaction for Copeland, the company had net cash of $3.15 billion on the balance sheet according to their 10-K filing. This will change when the company reports fiscal Q1 2024 results and includes the debt from the National Instruments acquisitions (less than 2 times EBITDA).

Capital Return

Emerson Electric pays a quarterly dividend of 53 cents per share, which works out to a current yield of 2.37%. While not an exciting yield in a world where treasuries yield around 5%, Emerson has been consistently increasing its dividend every year for 68 years.

The company completed a $2 billion buyback program in fiscal 2023 (ended September 2023) and has an additional $500 million allocated to a new buyback program for 2024

Conclusion

Emerson Electric checks most of the boxes I look for including insider buying by a long serving independent director, improving underlying business fundamentals, a buyback program and a reasonable valuation. The only reason I am holding off on adding the company to the model portfolio is because the model portfolio is fully invested at this time and we have exposure to two other industrial companies.

I plan to track the company closely and will add it to our watchlist for inclusion in the model portfolio in the future.

Welcome to edition 709 of Insider Weekends. Insider buying declined significantly last week with insiders purchasing $28.59 million of stock compared to $119.14 million in the week prior. Selling also decreased to $1.35 billion compared to $2.51 billion in the week prior.

Sell/Buy Ratio: The Insider Sell/Buy ratio is calculated by dividing the total insider sales in a given week by the total insider purchases that week. The adjusted ratio for last week went up to 47.15. In other words, insiders sold more than 47 times as much stock as they purchased. This week, the Sell/Buy ratio was favorable, compared to the prior week when the ratio stood at 29.46.

Notable Insider Buys:

1. White Mountains Insurance Group, Ltd. (WTM): $1,528.99

Director Weston M. Hicks acquired 1,000 shares of this insurance company, paying $1,480.56 per share for a total amount of $1.48 million. Mr. Hicks increased his stake by 76.57% to 2,306 shares with this purchase.

You can view the list of recent insider transactions for White Mountains Insurance Group, Ltd. here.

2. Heartland Express, Inc. (HTLD): $13.26

Shares of this trucking company were acquired by 2 insiders:

• Chief Executive Officer Michael J. Gerdin acquired 95,602 shares, paying $13.08 per share for a total amount of $1.25 million. These shares were purchased indirectly by a trust.
• Director Michael John Sullivan acquired 2,000 shares, paying $12.92 per share for a total amount of $25,840. Mr. Sullivan increased his stake by 9.84% to 22,331 shares with this purchase.

You can view the list of recent insider transactions for Heartland Express, Inc. here.

3. Iridium Communications Inc (IRDM): $37.48

Chief Executive Officer Matthew J. Desch acquired 28,000 shares of this satellite communications services provider, paying $37.01 per share for a total amount of $1.04 million. Mr. Desch increased his stake by 4.12% to 706,912 shares with this purchase.

You can view the list of recent insider transactions for Iridium Communications Inc here.

4. Emerson Electric Co. (EMR): $88.51

President & CEO Surendralal Lanca Karsanbhai acquired 10,000 shares of this industrial products company, paying $88.20 per share for a total amount of $881,963. These shares were purchased indirectly by a trust.

You can view the list of recent insider transactions for Emerson Electric Co. here.

5. Avient Corp (AVNT): $34.42

Chairman, President & CEO Robert M. Patterson acquired 24,304 shares of this formulator of material solutions, paying $34.55 per share for a total amount of $839,589. Mr. Patterson increased his stake by 4.14% to 610,897 shares with this purchase.

You can view the list of recent insider transactions for Avient Corp here.

You can view the full list of purchases from this Insider Buying page.

Notable Insider Sales:

1. Walmart Inc (WMT): $156.06

Shares of Walmart were sold by 4 insiders:

• Director Robson S. Walton sold 2,161,400 shares for $155.77, generating $336.69 million from the sale. These shares were sold indirectly through a trust.
• Executive Vice President Rachel L. Brand sold 16,840 shares for $156.04, generating $2.63 million from the sale.
• President and CEO Douglas C. McMillon sold 9,708 shares for $154.91, generating $1.5 million from the sale.
• Executive Vice President John R. Furner sold 4,375 shares for $155.47, generating $680,181 from the sale.

You can view the list of recent insider transactions for Walmart Inc here.

2. Charter Communications Inc. (CHTR): $405.92

Executive Chairman Thomas Rutledge sold 239,726 shares of this broadband connectivity and cable operator company for $411.29, generating $98.59 million from the sale.

You can view the list of recent insider transactions for Charter Communications Inc. – Class A here.

3. Meta Platforms Inc (META): $338.23

Shares of Meta Platforms were sold by 3 insiders:

• COB and CEO Mark Zuckerberg sold 112,036 shares for $335.40, generating $37.58 million from the sale. These shares were sold indirectly through various entities.
• Chief Product Officer Christopher K. Cox sold 10,000 shares for $340.02, generating $3.4 million from the sale. These shares were sold indirectly through a trust.
• Chief Legal Officer Jennifer Newstead sold 566 shares for $338.48, generating $191,580 from the sale.

You can view the list of recent insider transactions for Meta Platforms Inc – Class A here.

4. Medpace Holdings Inc (MEDP): $277.02

CEO August J. Troendle sold 100,000 shares of this clinical research-based drug and medical device development services provide for $274.68, generating $27.47 million from the sale. These shares were sold indirectly by Medpace Investors, LLC.

You can view the list of recent insider transactions for Medpace Holdings Inc here.

5. Apple Inc (AAPL): $189.97

SVP, GC, and Secretary Katherine L. Adams sold 123,448 shares of Apple for $188.79, generating $23.31 million from the sale. These shares were sold indirectly through a trust.

You can view the list of recent insider transactions for Apple Inc here.

You can view the full list of sales from this Insider Sales page.

The list of all insider purchases and sales by management people is only available to InsideArbitrage Premium and Plus members.

Disclaimer:  I hold a long position in Meta (META). Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.