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Emerson's Ovation Platform to Boost Power Plant Efficiency

Zacks Equity Research

Global manufacturing and technology company, Emerson Electric Co. EMR has granted the owners of coal, combined cycle and other power generation facilities the power to fundamentally change the way they operate their power plants, through its Ovation simulation platform.

Ovation enables operators to assess and appraise diverse operating strategies, prior to implementation in a real time, virtual way, thus reducing operational risks. Per Emerson, Ovation’s high-fidelity embedded simulation has doubled its sales over the past year, indicating robust demand and emphasizing its potential for minimizing risk and optimizing power plant reliability.

This closely follows completion of the sale of Emerson’s Network Power business earlier this month, to Platinum Equity and a group of co-investors, for a consideration of $4 billion.

The company has been aggressively restructuring its portfolio in recent months, with huge acquisitions as well as significant divestments. In fact, investors have been optimistic about the company’s efforts, as Emerson’s shares appreciated 10.7% over the last three months, outperforming the Zacks categorized Machinery – Electrical industry average of 5.6%.

Per a 2016 U.S. Energy Information Administration report, the global demand for electricity will grow 69% by 2040. This will exert further pressure on reliable generation and increase stress on production equipment, thus flaring up maintenance costs and the risk of unplanned outages. Thus, Emerson’s intelligent control systems, realistic training and simulation platforms, and easier-to-use technologies will help the operators face these challenges.

In fact, Emerson is the only company which offers a single automation platform for both control and simulation, thus decreasing complexity and enabling power generators to run their plants efficiently.

However, Emerson’s Process Management segment has been under pressure in recent times, as spending levels in energy-related markets remain low for both capital and operational expenditures. During fourth-quarter fiscal 2016, Emerson’s Process Management sales dropped 11% year over year. Sustained weak global economic circumstances, depressed industrial spending and oil and gas slowdown might continue to hamper Emerson’s growth in the future.

Analysts also seem to have some apprehensions about Emerson’s immediate prospects. Over the past two months, the company has seen five downward estimate revisions compared to three upward. This has led the Zacks Consensus Estimate for fiscal 2017 earnings to go from $2.73 to $2.40, which indicates decidedly bearish analyst sentiment for the stock.

The company recently stated that the sale of three of its businesses – Network Power, Leroy-Somer and Control Techniques – will generate $5.2 billion in proceeds. Emerson believes that undertaking these extensive streamlining measures will free up resources which can be reinvested in core business areas to boost growth.

Once the restructuring is complete, the company expects to be better equipped to cross-leverage its remaining portfolio and navigate businesses in a tough macroeconomic environment. The company has also shared its plans to divest the ClosetMaid business by 2017. Further, it is focusing on devising cost cutting and divestment plans to unlock greater benefits.

In fact, Emerson has been actively making acquisitions as well, as part of its strategic portfolio repositioning strategy. In the past three months, the company has finalized several buyouts as it seeks to expand its capabilities, including Pentair Valves & Controls – a business unit of Pentair plc PNR, Permasense and FMC Technologies, Inc.’s FTI Blending & Transfer Systems business. It also took a significant step to expand its global capabilities in fresh food monitoring, with the acquisitions of Locus Traxx and PakSense.

The company believes that strategic mergers and acquisitions, along with its restructuring initiatives, will help achieve over $20 billion in sales.

Emerson presently carries a Zacks Rank #3 (Hold).

Stocks to Consider

A better-ranked stock in the same space is II-VI Incorporated IIVI, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

II-VI Incorporated has registered a remarkable positive average surprise of over 39.8% in the four trailing quarters, driven by four strong consecutive beats.

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