UBS released a research report this week, upgrading its rating on Emerson (EMR.US) from Neutral to Buy. The report suggests that recent headwinds in the software business are obscuring stronger underlying demand trends, which are expected to drive future earnings beats and valuation expansion. UBS research analyst Steven Fisher set a price target of $168, implying over 20% upside from recent share prices. He stated that Emerson's performance guidance appears conservative relative to its order growth momentum. "Emerson's guidance for +4% organic growth in fiscal 2026 is significantly below its recent actual order growth of +6%, which could lead to sustained upward revisions to expectations ahead of fiscal 2026," Fisher wrote in a January 4th report to clients. UBS expects that the timing of software contract renewals will weigh on reported performance in the near term but emphasizes that the impact is non-cash and temporary. "Short-term software-related headwinds are diverting attention from robust underlying demand, which we believe should drive share price appreciation," Fisher said, adding that once these headwinds subside, organic sales growth should accelerate to 5%-6% annually. Looking beyond 2026, UBS forecasts that the company's earnings per share (EPS) will return to double-digit growth, supported by factors including mid-single-digit organic growth, approximately 40% margin rates, and capital returns. Fisher indicated that with net debt trending below 2x EBITDA, UBS now assumes the company will execute $6 billion in share buybacks over the next three years, which will help boost earnings. "We see a path to achieving double-digit annual EPS growth," he wrote, predicting fiscal 2028 EPS will exceed $8, approximately 35% higher than fiscal 2025. UBS also cited valuation as a key factor in this rating upgrade. Although the bank believes Emerson's return on invested capital is improving, its share price still trades at a discount to the valuation levels of industrial sector ETFs. "Valuation should closely follow the trend in return on invested capital," Fisher said, suggesting that sustained execution and capital allocation could support a valuation re-rating over time, even though UBS has not factored this into its base case assumptions.
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