October 21, 2019 BARRON’S M5
(MDT), managed-care titan Cigna, and
health-services company Cerner (CERN).
“When investors are worried about the econ-
omy, they seek out the stocks that have been
reliably defensive,” Trahan writes.
And if the economy holds up? The health-
care sector has enough risky stocks, particu-
larly in biotech, to participate if the market
moves higher. In an uncertain world, we’d
say that’s a healthy mix for any portfolio.
Emerson in the Spotlight
Activist investor D.E. Shaw is pushing for
change at Emerson Electric (EMR), claim-
ing that tighter cost controls, better corpo-
rate governance, and splitting the company
in two could push the stock 50% higher.
Regarding costs, the hedge fund pointed
to the company’s fleet of eight private jets
(and a helicopter) in a letter it sent to the
Emerson board on Tuesday. [For more, see
The Activist Investor on page M11.]
Emerson responded to some of Shaw’s
claims in a news release, citing its above-
market growth rates and 47% total share-
holder return since 2016.
Gordon Haskett analyst John Inch spoke
with Emerson management to get its side of
the story. He was told that Shaw’s cost-sav-
ings estimate is far too high. Shaw eyes
more than $1 billion in cost cuts, while Em-
erson says a more reasonable number is
$200 million to $300 million.
Emerson was already looking to reduce
costs, having announced a strategic review
Oct. 1, catalyzed partly by the slowdown in
global manufacturing. Shaw had earlier en-
gaged with Emerson management, people fa-
miliar with the situation tell Barron’s.
For shareholders, the question remains:
Is there value to be unlocked at Emerson?
The Street says yes—sort of. Most ana-
lysts agree there is opportunity in the stock,
but think Shaw’s cost targets are too ag-
gressive. “D.E. Shaw’s critique is direction-
ally fair, though magnitude of opportunity
appears overblown and timing is a hurdle,”
Baird’s Mike Halloran wrote this past week.
His sentiment was repeated by most other
analysts covering the company.
Halloran doesn’t think that now is the
time to break the company into two pieces—
one making climate controls and the other,
automation equipment. The economy is too
weak, he argues.
“I don’t really care about the breakup,”
Tampa, Fla., police and fire pension man-
ager Jay Bowen tells Barron’s. “There
might be some value in better focus, but the
woes of the energy market are a big reason
Emerson shares have underperformed.” Bo-
wen, who owns the stock, calls Emerson a
“high quality” company. He expects cyclical
stocks, including Emerson, to perform bet-
ter in 2020, after monetary and fiscal stimu-
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Credit Suisse ’s John Walsh, who says
that software-like recurring sales will drive
the stock higher, rates it a Buy with a $73
price target. (It closed Friday at $68.68.)
Digital sales are becoming more important
for industrial companies. Emerson says that
its digital offerings already bring in $650 mil-
lion in annual sales, about 3% of its total
sales, and management has announced initia-
tives to boost digital growth.
RBC Capital Markets analyst Deane
Dray also rates Emerson stock a Buy. He
upgraded the shares after reports of the
Shaw stake surfaced. The average industrial
asset in the S&P 500 trades at about 12
times estimated earnings before interest,
taxes, depreciation, and amortization, or
Ebitda. Dray argues that Emerson deserves
a premium, especially with an activist pres-
ent. His price target: $77.
The best outcome for both Shaw and
other shareholders might be a negotiated
settlement, rather than a company split.
Aside from the macroeconomic backdrop,
shares of some industrial conglomerates—
notably DuPont de Nemours (DD)—have
gotten stuck in “deal limbo” when massive
transformations were announced. That is
when shares underperform peers as inves-
tors wait for big changes to wrap up.
The important dates to watch in this ac-
tivist battle are Nov. 5, when fiscal fourth-
quarter earnings are reported, and one day
later—the deadline for nominating directors.
Shaw might nominate its own board candi-
dates if it can’t agree on a plan of action
with management.
The company referred Barron’s to its ear-
lier statements about D.E. Shaw, but also
sent the following message: “Emerson is a
global organization with a hands-on manage-
ment team that frequently visits employees,
customers, local government, and other
global stakeholders for work purposes.”
—ALROOT
Industry Action
**Performance of DJ U.S. Ind, ranked by wkly % chg.***
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Health Care 1.99
Financials 1.25
Consumer Services 0.85
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Industrials 0.34
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–0.73 Technology
–1.72 Oil & Gas
*ForbreakdownseepageM32. Source:S&PDowJonesIndices
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