Episode Details

Emerson Electric Co. (EMR) Q3 FY2026 — Adjusted EPS $1.71 vs Emerson's own $1.65-$1.70 guide and the Street's $1.68. Net sales $4,873M, +7%. Free cash flow $1,323M, +36%. Orders +7%. GAAP EPS $1.28 - but $0.11 of that is a tariff refund. Emerson beat and raised - and both moves are smaller than the headlines suggest. The $1.71 cleared the top of Emerson's OWN $1.65-$1.70 guide, issued 91 days earlier, by one cent, and the full-year raise took adjusted EPS to ~$6.55 - the top of the old range, not above it. THE CALL: HOLD (3/5, AN EXCELLENT QUARTER, AND A RAISE THAT IS MOSTLY THE QUARTER) — base-case value ~$142.0 vs ~$158.84 today. KEY METRICS: - CALL: HOLD 3/5, fair value ~$142 vs the $158.84 close (-10.6%). Base DCF: $3.60B of guided FY2026 free cash flow compounded at 6% for ten years, terminal growth 2.5%, discounted at 8.0% = $88.2B enterprise value; less $10.93B net debt = $77.3B equity; over 561.1M diluted shares = $138. Multiple cross-check at 20.5x our FY2027E $7.15 = $147. Weighted 60/40 we take ~$142. Bear $99, bull $184. The Street: Buy, $161.56 average (41 analysts, 22 buy / 16 hold / 3 sell), high $185, low $144 - their MOST BEARISH published target is $2 above our fair value. - WHAT WAS THE BAR - AND HOW BIG WAS THE RAISE. On May 5 Emerson guided Q3 adjusted EPS to $1.65-$1.70 and net sales growth of ~5.5%. It printed $1.71 and +7%. Against its own guidance: one cent. Against the Street's $1.68: three cents. Then the full-year adjusted guide went from $6.45-$6.55 to ~$6.55 - the TOP of the old range, not above it. Midpoint +$0.05. The quarter itself beat its own midpoint ($1.675) by $0.035. The May framework implied ~$1.835 for Q4; the new guide says ~$1.85. Emerson raised the year by roughly the amount it had already banked, plus about a cent and a half. - THE GAAP GUIDANCE ACTUALLY WENT DOWN. The GAAP range went $4.79-$4.89 to ~$4.89, also a five-cent midpoint raise. But the new framework contains a line the May one did not: ~$(0.11) of IEEPA tariff refunds. Strip it out and GAAP guidance fell ~6 cents, because the restructuring line inside it went from ~$0.18 to ~$0.24 and acquisition costs from ~$0.06 to ~$0.09. Bridge check: 4.89 + 1.39 amortisation + 0.24 restructuring + 0.09 acquisition + 0.05 discrete taxes - 0.11 IEEPA = $6.55. Adjusted up, GAAP like-for-like down, both in the same table. - $82M OF THE PRETAX IMPROVEMENT IS A REFUND. Pretax earnings went $734M to $916M, up $182M - and $82M of that, 45%, is a one-time IEEPA tariff recovery, disclosed in Table 5 (corporate and other: -$72M to -$1M) and Table 6 (subtracted as $0.11). Take the eleven cents out of GAAP EPS and it is $1.17, up 14%, not $1.28 and 24%. To Emerson's credit, it EXCLUDED the refund from adjusted EPS - the conservative treatment. On the cleaner adjusted line, EBITA rose $120M ($1,183M to $1,303M). - THE SOFTWARE SEGMENT EARNED LESS ON MORE. Control Systems & Software - where AspenTech sits, the asset the re-rating story rests on - grew sales 7% ($1,120M to $1,199M) and its adjusted EBITA FELL $2M, $393M to $391M; margin 32.6% vs 35.2%. Meanwhile Test & Measurement (National Instruments) grew 23% ($360M to $445M) with adjusted EBITA $81M to $132M - 29.6% vs 22.4%, a 60% incremental margin - and GAAP EBIT turned positive at $11M vs -$26M. The asset with the software multiple grew earnings by nothing; the one everybody wrote off carried the quarter. What to watch: Changes our mind UP: two straight quarters of Control Systems & Software growing adjusted EBITA in DOLLARS (it fell $2M on 7% more revenue), or FY2027 guidance above $7.30. Confirms the bear: orders below 4%, or Europe negative a fourth quarter. We'd buy at $128-$138. Also on YouTube: @ChargedAlpha DISCLAIMER: For informational and educational purposes only. Not financial advice. Do your own research before any investment decision.