Should You Power Your Portfolio With Emerson Electric?

Emerson Electric (NYSE: EMR) -- it provides industrial process control services and appliances like electric motors and water valves -- reported strong earnings growth Tuesday. Should this stock be in your portfolio?

Emerson's third quarter net income and sales were up -- but they did not beat expectations. Specifically, Emerson Electric's net income of $683 million was 17% above the year before's $585 million and it met EPS expectations of $0.90 per share for the quarter.

Emerson's net sales for the quarter rose 16% to $6.29 billion -- $100 million less than 17 analysts' consensus revenue estimate. Meanwhile, Emerson held onto its EPS forecast for the year of between $3.20 and $3.30 with sales growth in the range of 10% to 13%.

Is this strong earnings report enough of a reason to warrant an investment in Emerson stock?

Here are two reasons to consider it:

• Out-earning its cost of capital. Emerson is earning more than its cost of capital – and it’s improving. How so? It produced positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first nine months of 2011, Emerson ’s EVA momentum was 1%, based on first nine months' 2010 annualized revenue of $20.2 billion, and EVA that rose from $787 million annualizing the first nine months of 2010 to $960 million annualizing the first nine months of 2011, using a 10% weighted average cost of capital.
• Decent dividend. Emerson's dividend yield is 2.81%

There are three reasons to consider avoiding Emerson:

• Slow growth and somewhat shaky balance sheet. Emerson has been growing slowly. Its $21 billion in revenues have increased at an average rate of 1.6% over the last five years and its net income of $2 billion has risen at a 2.1% annual rate over that period -- yielding a 9.9% net profit margin. Its debt has grown quickly but its cash is rising even more rapidly. Emerson's debt climbed at 10.4% annual rate from $3.1 billion (2006) to $4.6 billion (2010) while its cash rose at an 18.6% annual rate from $810 million to $1.6 billion.
• Mixed earnings reports. Emerson has missed analysts’ expectations in three of the last five earnings reports and beaten expectations in two of them.
• Somewhat high valuation. Emerson's price to earnings to growth of 1.15 (where a PEG of 1.0 is considered fairly priced) means it is slightly over-valued. It currently has a P/E of 21 and is expected to grow 18.2% to $3.87 in fiscal 2012.

My conclusion is that this stock needs a catalyst and it does not seem to have one. I would avoid it for now.