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Emerson’s 15% Profit Drop in Q3 Mitigated by Its Solid Cash Flow

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Emerson Electric’s free cash flow in 3Q16

Despite a 15% decline in net profits, Emerson Electric (EMR) reported a solid cash flow performance in 3Q16. Free cash flow (or FCF) is derived by deducting capital expenditures from operating cash flows. FCF highlights the amount of cash a company is able to generate after accounting for expenditures to maintain its asset base. Emerson reported FCF of $611 million against $342 million in 3Q15.

A large portion of the increase was driven by a year-over-year comparison of operating cash flow. In 3Q15, Emerson’s operating cash flow was eroded by taxes paid on the gain from the divestiture of the Power Transmission solutions business.

Since such one-time payments weren’t present in 3Q16, operating cash flow increased 44% to $718 million year-over-year. Moreover, capital expenditures in 3Q16 were lower by $50 million compared to 3Q15.

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Liquidity and debt

Emerson’s (EMR) liquidity has improved substantially over the years, with cash and cash equivalents forming 15.9% of its total assets. Emerson’s cash holdings as a percent of total assets have increased steadily from 8.6% in 2011 to 13.8% in 2015.

The company’s cash holdings now stand at $3.5 billion against long-term debt liabilities of $4 billion. Since the company is likely to gain $4 billion cash proceeds from the sale of businesses, cash holdings will end up higher in fiscal 2016 as well. We’ll cover this in more detail in the next part of the series.

Key ETFs

Investors interested in trading in the industrial space could look into the Guggenheim S&P 500 Equal Weight Industrials ETF (RGI). Those interested in trading in dividend-based ETFs could consider the ProShares S&P 500 Dividend Aristocrats (NOBL). Major holdings in NOBL are AT&T (T) and Sysco (SYY), each with weights of 2.2%.

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