By: Scott Davis
Emerson willing to pay $215 for ROK may represent a “peak of cycle” type valuation and should be seriously considered by ROK’s board, particularly if that price can get to $225. The challenge is this…we see $240 as maximum value of the entity. And even at potential peak earnings of $10.00 EPS, a $225 offer would be a 22-23x peak P/E deal, hard for ROK not to take that. And what if $10 EPS never occurs and more “normal” is $8.00 – that would imply a P/E of 28x (at $225). And the bigger risk is the next downcycle, where ROK could trade back down to $100 (20x a $5.00 number). Then they really missed out on an opportunity to monetize at the top. These types of offers don’t come around every day. Recall it wasn’t that long ago that the M&A chatter on ROK was at a $150 price. It’s not unrealistic to assume that ROK through the cycle could trade from $225 to $100 and back to $225. Could be another 7 years to hit that level though. Is ROK’s board willing to take that risk? I sure wouldn’t.