Emerson Electric Co. (EMR) has been trading in the range of $53.42 – $60.95 over the past 30 days, showing support and resistance around $54.50 and $57.50, respectively.

The stock is trading above its 50-day and 200-day moving averages, with an RSI (14) of 69.27. Figure 1 below shows that the stock traded in a range $48 – $53 from the middle of August 2012 until the end of last year, and has since then made an upward move to the $58 levels, now trading in a range from $53.50 to $59.30. The channel has broken at the time of writing of this report and if the stock stays above the $60 level it might be up for another run.

Bottom line? Our indicators give a bullish view on EMR.
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A LOOK AT FUNDAMENTALS

EMR’s short term bullish technical indicators are supported by strong fundamentals, as well.

The company reported that it earned $561 million, or $.77 earnings per share, for the quarter that ended March 31, 2013. That’s up from $545 million, or $.74 earnings per share, for the same quarter last year. Revenue increased 1% to $5,960 million, from $5,919 million, with revenue increasing in Process Management and Climate Technologies business segments, and falling in Industrial Automation, Network Power, and Commercial & Residential Solutions.

PRICE/EARNINGS

EMR PE stands at 21.34, above the industry average of 14.93 and the S&P 500 average of 18.43.  It is currently trading above the preferable P/E ratio of 15x and, over the last 5 years, its shares have traded in the range of 8.56x to 22.53x trailing 12-month earnings. EMR’s current Price/Sales of 1.75 is above the average of its industry, which is 1.36. 

Further, a head-to-head comparison to its main competitors shows that the company has better gross margin and operating margin, and enjoys a net income second only to GE and an EPS second only to HTHIY. Last, EMR is trading at slightly higher P/E and P/S multiples than its main competitors.

The stock is currently trading 25% below its intrinsic value of $79.98, which suggests that the stock is undervalued at these levels. The beta of 1.36 implies slightly higher volatility than the S&P 500. 

OPTIONS STRATEGY RECOMMENDATION

Technical and fundamental indicators both show a short term bullish signals for EMR.  Investors should consider the following debit call spread:
Buy September 2013 60 Calls at $1.70 and sell the September 2013 62.50 Calls at $0.70.

The net debit to start is $1.00, and we recommend holding until spread price reaches $2.00.  This strategy will allow the trader to collect time premium for out of the money short calls and to decrease the overall cost of the initial investment.

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