Tickers in this Article: EMR, ABB, ETN, ERIC, HON, JCI, IR
Industrial conglomerate Emerson (NYSE:EMR) offers an interesting case-study for investors after reporting its second quarter numbers. Should investors overlook a small stumble from an otherwise reliable and well-run industrial company, or should investors flee at this first sign of trouble and move into hotter names?

How an investor answers this question probably goes straight to the heart of their philosophy as an investor. Patient investors who seek out well-run companies for long-term gains should probably think of adding more, while investors who embrace higher turnover may well find it is time to chase faster prey.

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Some Turbulence in a Strong Q2
On the whole, Emerson had a solid second quarter report, but the results were a little shy of analyst expectations - and for better or worse, that does shape a lot of near-term stock performance.

Revenue was up 18% on a reported basis, and up 14% on an organic basis. Growth was led far and away by industrial automation, where revenue jumped 30%. Process growth did not match the torrid pace of industrial automation, but top-line growth of 16% (and underlying growth of 11%) was still a solid performance.

Looking at profitability, Emerson's gross margin compressed by an insignificant amount. At the operating line, earnings rose 30% from the year-ago level, with margins expanding by about 160 basis points. Industrial automation was a leader here too, with excellent unit margin expansion (roughly 300 basis points), while network power margins compressed due in part to struggles in China and integration expenses from the Chloride acquisition.

Is There a China Problem?
Figuring out Emerson's network power business is a challenging exercise. ABB (NYSE:ABB) has had some noteworthy issues of late getting its power business really going. On the other hand, Schneider Electric (Nasdaq:SBGSY.PK) recently reported pretty healthy power results, with solid outperformance in China, and Eaton's (NYSE:ETN) power results for the first quarter looked healthy as well. (For more, see Eaton Shows Broad Recovery Continues.)

Now, these three companies do not line up perfectly across markets and products, but it is an interesting divergence. What makes it even more interesting is that Ericsson (Nasdaq: ERIC) recently reported strong equipment sales growth in China, and it was Chinese telecom that was a notably weak area for Emerson. Maybe it's just a timing issue, but maybe Emerson is seeing some share loss - it is a little strange to think that Chinese telecoms need Ericsson's gear to expand their networks, but don't need more network power equipment to run it.

Other Areas Doing Well
It is hard to find a lot of fault in the other Emerson business lines. Like ABB and Honeywell (NYSE:HON), Emerson is seeing big-time demand in process and industrial automation. Elsewhere, while growth in climate is not quite as torrid for Emerson, the company is holding its own with the likes of Johnson Controls (NYSE:JCI), Honeywell and Ingersoll Rand (NYSE:IR).

The Bottom Line
In terms of industrial conglomerates, Emerson looks priced more or less on par with companies like ABB, Dover (NYSE:DOV) and Illinois Tool Works (NYSE:ITW) in terms of capital appreciation potential. Siemens (NYSE:SI), then, sets up as the cheaper option and one with a lot of market overlap with Emerson.

Investors who choose to hang on to Emerson shares and hold it through this so-called disappointment are not likely to bring shame to their clan or face shunning. It is a well-run industrial that addresses multiple markets with good near-term growth prospects. That said, bargain hunters may want to wait just a bit longer before pulling the trigger, as there are other, better bargains to be had. (For more, see ABB Needs To Power Up.)

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