Emerson Electric (EMR)

Total return at 5 years: -3.2%/year = -4.8% appreciation + 1.7% dividend. The target price ($127) is ex-dividend; the $12 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $145 · Multiples $113) is below the market price ($162).

Today — expensive, no margin of safety: at $162 trades ~44.4% above its value discounted to today (~$113); the expected return does not even reach the risk-free rate (4.5%).

At 5 years — Sobrevalorado: the expected total return is negative — the price already discounts a demanding scenario that, if not met, results in a loss.

The bridge: the return at 5 years falls below the risk-free rate (4.5%) — which is why there is not even a discount to today's value. To require a 15% annual return, it would need to be bought at ~$71.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($162) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The price discounts growth (6.9%/year) above our base case (4.6%/year) → it is priced for a demanding scenario and leaves little cushion against a slowdown.

That growth implies ~$4.7 bn of owner earnings in year 5 (vs ~$4.2 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). Cash accumulates the retained surplus —what is not returned as dividend or buyback—, so that EV falls and multiples compress going forward. The valuation is done on EV/EBIT. In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

An enterprise-level model (pre-interest): the flow being valued is EBIT, so the cash and debt in the common block are the real balance sheet figures (cash US$2.18bn, total debt US$13.11bn at 30-Jun-2026), not zero. Year 0 is the TTM ended 30-Jun-2026 (US$18.64bn of revenue). The path starts with the guidance in the 8-K of 4-Aug-2026 (reported sales growth of ~5% for fiscal 2026, with underlying orders accelerating to +7% in the third quarter) and decelerates geometrically toward a durable ~4.2% by year 5, within the 4-8% band of a mid-cycle industrial. The EBIT margin starts at 19.5% (TTM, calculated as pre-tax income plus reconstructed net interest: US$237M in fiscal 2025, US$258M in the nine months of fiscal 2026 against US$145M in the prior year) and expands gradually toward 21.4% by year 5, reflecting the shift toward software (Software and Control went from a relative operating loss in 2024 to a 14.5% margin in 2025 after integrating AspenTech). Maintenance capex is anchored to reported real capex (US$452M TTM, barely 2.4% of sales): most of TTM depreciation and amortization (US$1.48bn) corresponds to the amortization of intangibles from the AspenTech and National Instruments acquisitions (US$884M in fiscal 2025 per the "other deductions" note), a non-economic charge tied to purchase accounting that declines over time — the D&A path is modeled as declining for that reason, not growing with sales. Buybacks are anchored to the explicit guidance in the 8-K (~US$1,000M of buybacks and ~US$1,200M of dividends for the full fiscal 2026), via `sharesPath` with `accumulateCash:false` (cash is not accumulated, to avoid double-counting with the explicit buyback). The base exit multiple (14×) sits in the lower half of the industrial archetype band [12,18] because the return on invested capital runs below the 10% bar (~8.9%), deflated by the goodwill from recent acquisitions — a declared effect, not a sign of poor operating quality. The result: with the stock trading well above the band, compression toward the archetype band dominates projected EBIT growth in all three scenarios.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $127 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $162, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $127 in 5 years plus $12 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $113. Against the current market price ($162), the margin of safety is -44.4% (trades above the maximum → a premium is paid) and the total return at that price would be -3.2% annually.

• Entry multiple. Trades at 28× EBIT, well above the ceiling of the industrial archetype band (18x).
• Margin of safety. No margin of safety: the price already discounts a demanding scenario.
• Sensitivity to the terminal multiple. Even in the favorable scenario with a multiple near the ceiling of the band, the resulting return remains modest due to compression from the current level.
• Dividend yield. Current dividend yield around 1.4% at the current price, a minor component of the total return.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✕ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (130%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Cash generation. Free cash flow of $3.46bn over the trailing twelve months, improving from $2.67bn in fiscal year 2025.
• Return on capital. ~8.9% on invested capital, below the 10% bar, pulled down by the goodwill from recent acquisitions.
• Reinvestment runway. Contracted backlog and the shift toward software give a credible reinvestment runway, though the incremental return is not yet reflected in total capital.
• Earnings quality. Reported earnings are depressed by non-economic amortization of acquired intangibles; free cash flow grows faster than reported net income.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

R&D and engineering spending confirms the shift toward software (from 6.9% to 8.1% of sales in two years). The contracted backlog gives 12-24 month demand visibility and grew modestly over the last year. The high share of international sales (59%) exposes the business to currency and geopolitical risk, disclosed in the risk section.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Recent growth. TTM revenue grew 4.8%, with underlying orders accelerating to 7% in the third quarter of 2026.
• Guidance. Underlying sales guidance raised to ~3.5% for the full fiscal year 2026, with adjusted EPS guided at $6.35-$6.55.
• Growth composition. Test & Measurement grows 15% underlying; the rest of the portfolio grows low single digits, growth concentrated in a single piece.
• Geographic exposure. Europe declining (-1% in the third quarter), offset by Americas and Asia-Middle East-Africa growing strongly.

• Recurrence and predictability. Backlog of $8.6bn and control systems embedded in long-lived processes give 12-24 month demand visibility.
• Product differentiation. Leading brands by line (Fisher, Rosemount, DeltaV, AspenTech) with high switching costs in critical processes.
• Operating leverage. EBIT margin expanded 270 basis points in the third quarter of 2026 with sales growing 7%, showing positive operating leverage.
• Cyclicality. Tied to global industrial capital investment; the Intelligent Devices segment is more cycle-sensitive than Software and Control.
• Portfolio concentration. The recent transformation left a narrower portfolio concentrated in automation, as the filing itself acknowledges.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• !Leverage (net debt / EBITDA)Net debt / EBITDA 2.1x
• ✓Interest coverage (EBIT / interest)10.4x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 130% of ROIC
• ✕Value creation (ROIC − 10% bar)-1pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.3x — no over-investment
• !Float / working capitalConsumes cash $0.4 bn (positive WC)
• ✓Dilution (SBC % of revenue + shares)SBC 1.3% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. Total debt of $13.1bn against cash of $2.2bn after financing the purchase of AspenTech's minority interest in 2025.
• Interest coverage. TTM EBIT (~$3.63bn) amply covers estimated TTM net interest (~$0.35bn), more than 10 times.
• Liquidity. Cash of $2.18bn as of June 2026, up from $1.54bn in September 2025.
• Debt structure. Mix of short- and long-term debt ($5.59bn and $7.53bn respectively), with gradual reduction of long-term debt during the quarter.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Capital allocation. Two divestitures and two large acquisitions in three years, with stated focus on higher margins and growth; no evidence of diworsification.
• Incentive alignment. No controlling shareholder or founder vehicle; directors and executives as a group hold no more than 0.5% ownership.
• Dividend track record. Increase to an annualized rate of $2.22 per share announced in November 2025, consistent with decades of dividend growth.
• Market communication. Guidance was raised in August 2026 after beating expectations, with detailed margin and cash flow breakdown by segment.

• No clear source of discount is identified: there is no forced selling, no non-recurring event weighing on reported results, and with guidance just raised
• The price already incorporates the software transformation narrative (AspenTech, Test & Measurement) with recent momentum in orders and margin
• Return on capital below the 10% bar — although explained by the goodwill from recent acquisitions — does not provide an additional undervaluation argument

The absence of an identifiable source of discount (missing buyers or motivated sellers) is itself the signal that the stock is not cheap: the current price reflects solid recent execution and expectations of continuity, not a perception-reality gap in the buyer's favor.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -11%/year (-43% total): the margin of safety protects the downside. The bull (+4%/year, +19% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• M&A integration. The portfolio became narrower after recent divestitures and acquisitions, potentially more volatile to market changes.
• Tariffs and trade. The 10-K devotes specific attention to U.S. tariffs and trade retaliation as a material risk.
• Geopolitical. 85 of ~120 plants outside the U.S., with disclosed exposure to the Russia-Ukraine and Middle East conflicts.
• Artificial intelligence. New risk of inaccuracy, intellectual property and cybersecurity in the integration of AI into products and operations.
• Valuation. The current entry multiple leaves little margin for any execution disappointment or industrial cycle slowdown.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  Fails the quality gate: ROIC 9% does not clear the 10% bar.

• Peter Lynch Growth at a reasonable price (GARP)

  A cyclical growing 5% at a multiple/growth of 6.1 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 4% (EBIT/EV) + ROIC 9% → falls outside the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 7% vs our 5%: priced for perfection, no favorable mispricing.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -13%/yr over 5y (material loss) → risk of permanent capital loss.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: switching costs, efficient scale, intangibles, cost advantage → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  The price implies 7% vs our 5%: coherent, but at the optimistic end of the range.