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Emerson Electric Co

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					                                                                                             Stock Data
Company Overview
                                                                                         Current Price: $51.38
Ticker: EMR
                                                                                         52 Week High: $59.05
Exchange: NYSE
                                                                                         52 Week Low: $41.26
Sector: Industrial Goods
                                                                                         EPS: 2.66
Industry: Industrial
                                                                                         P/E: 19.25
Equipment & Components
                                                                                         P/B: 4.65
Market Cap: 40.27B
                                                                                         P/S: 1.81
Shares Out.: 789M
                                                                                         Beta: .94
Corp. HQ: St. Louis
                                                                                         Div & Yield: 1.20 (2.30%)
Founded: 1890
                                                                                         ROE: 25.24%
     Emerson Electric Co., incorporated in 1890, a diversified global technology company, engages in designing
     and supplying product technology and delivering engineering services to industrial and commercial, and
     consumer markets worldwide. The business segments of the company include Process Management,
     Industrial Automation, Network Power, Climate Technologies, and Appliance and Tools. Emerson does
     business in more than 150 countries. International destination sales, including U.S. exports, totaled $11.6
     billion in fiscal 2007, representing 52 percent of the company's sales. This marked the first time the
     company's international sales have surpassed its U.S. sales. Emerson has 265 manufacturing locations, of
     which approximately 165 are located outside the United States. Emerson was awarded a record 545 patents
     worldwide in 2006. The company was founded in 1890 and is based in St. Louis, Missouri.
                                       Recommendation: Don’t Buy
                            Growing presence in emerging markets with potential for
                             more growth, exposure to positive demographic trends.
                            Balance sheet is very clean, low debt, financial ratios show
                             positive trends and are superior to peers.
                            Delivers excellent results annually, Q1 2008 was no different.
                            Exposure to world’s robust energy, chemical, and telecom
                             industries, exposure to non-dollar denominated currencies.
                            SMF must remain price sensitive. Appears fairly priced:
                             current price doesn’t give enough of a cushion to merit
                             purchase, as prospects are already somewhat “baked in.”
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Table of Contents
Company History…………………………………………………………………………………………………………………………………………………………………………….……3

Recent Company News…………………………………………………………………………………………………………..……………………………………………………………5

Company Profile…………………………………………………………………………………………………………………………………………………………………………..……..6

Business Segments…………………………………………………………………………………………………………………………………………………………………………..….9

Revenue Breakdown……………………………………………………………………………………………………………………….……………………………………..………….10

Management………………………………………………………………………………………………………………………………………………………………………….………….11

Investor Relations………………………………………………………………………………………………………………………………………………………………………………13

Analyst Recommendations and Ownership……………………………………………………………………………………..…………………………………………………14

Macroeconomic/Industry Outlook………………………………………………………………………………………………………………………………….……….…………15

SWAT Analysis…………………………………………………………………………………………………………………………………………………………………….……………..19

Porter’s 5 Forces………………………………………………………………………………………………………………………………………………………………………………..20

Ratio Analysis…………………………………………………………………………………………………………………………………………………………………………………….22

      Extended DuPont Analysis…………………………………………………………………………………………………………………………………….……………..22

      Profitability Analysis………………………………………………………………………………………………………………………………………………….……..….22

      Asset Management Analysis……………………………………………………………………………………………………………………………..…….….……….23

      Debt Management Analysis………………………………………………………………………………………………………………………………………….……..24

      Liquidity Management Analysis……………………………………………………………………………………………………………………………….…..………24

      Growth Analysis………………………………………………………………………………………………………………………………………………………….……….25

Pro Forma Income Statement………………………………………………………………………………………………………………………………………………………......26

Multiples Valuation…………………………………………………………………………………………………………………………………………………………………………...28

FCFF Analysis……………………………………………………………………………………………………………………………………………………………………………………..32

Three Stage H-Model.………………………………………………………………………………………………………………………………………..………………………………33

Risks, Summary and Recommendation………………………………………………………………………………………………………………………………………….…..34

Financial Statements……………………………………………………………………………………………………………………………………………………………………......35

Value Line………………………………………………………………………………………………………………………………………………………………………………………….39
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Company History1
Emerson was founded in 1890 in St. Louis, Missouri, as a manufacturer of electric motors and fans. Over the
past 100 years, Emerson has grown from a regional producer into a global technology solutions powerhouse.

Modest Beginnings
Two Scotland-born brothers, Charles and Alexander Meston, who saw a tremendous business opportunity in
patenting a reliable electric motor, started the company. They persuaded John Wesley Emerson, a former
Union army officer, judge and lawyer, to be their principal investor. The company, then known as Emerson
Electric Manufacturing Co., quickly began exploring new uses for the largely untested technology of electricity
in a variety of household and commercial applications.

In 1892, Emerson sold the first electric fans in America — a product for which the company soon became
renowned. As the company grew, it expanded its product line by attaching electric motors to new products
such as sewing machines, dental drills, player pianos and power tools.

During World War II, Emerson was a supplier to the U.S. Army Air Force, becoming the world's largest
manufacturer of aircraft gun turrets. In the postwar era, the company faced the dual challenges of
rationalizing its highly seasonal fan product lines and responding to heightened competition from much larger
electric motor manufacturers.

Diversification with a Keen Focus
Those issues were addressed head-on in 1954 when the company's new chief executive, W.R. "Buck" Persons,
retooled and decentralized Emerson's manufacturing base and began a continuing process of diversification.
The company rapidly targeted high-growth markets and then made acquisitions to position Emerson favorably
within those markets. Persons reaffirmed a longstanding company policy of manufacturing components rather
than end products, and also instituted a strong focus on cost reductions, quality improvements and formal
planning.

When Persons retired as CEO in 1973, Emerson had significantly expanded its operations from 4,000
employees in two plants in 1954 to 31,000 employees in 82 facilities. Product lines had grown from five basic
products to hundreds, and in the process, Emerson had become a diversified corporation with nearly $1 billion
in sales.

Building on a Strong Heritage
Under Charles F. Knight, who was named CEO in 1973, Emerson evolved into a major global enterprise
producing technologically advanced products used in such markets as telecommunications, electronics,
heating, ventilating and air conditioning, and process controls. At the outset of his tenure, Knight expanded

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and refined a disciplined management process that has become famous in the business management world,
with its emphasis on planning and an annual cycle of conferences and reviews, both for divisions and for the
corporation as a whole.

During the 1970s and 1980s, Emerson made a series of restructuring moves and strategic acquisitions that
allowed the company to reposition its core businesses and diversify into several promising new areas,
including electric utility support, computer support and electronics, and process control. In 1984, Knight
announced a "best cost producer" manufacturing strategy, with increased emphasis on ever-higher global
competitive standards — both in terms of quality and cost.

Investment in Growth
In the 1990s, Emerson continued to upgrade its process and product technologies and markedly increased
sales overseas. Under Knight's leadership, the company repositioned itself for growth by launching several
initiatives to expand markets and leverage its human and technology resources.

One recent growth initiative includes a $2.5 billion investment in companies focused on fast-growth markets
for network power. These companies serve the needs of the rapidly expanding communications industry and
buildout of the Internet infrastructure. With the addition of Emerson Telecommunications Products and
Emerson Energy Systems in 2000, we added over $1 billion of annualized sales to our core network power
capabilities, making Emerson the global leader in highly reliable power systems. In conjunction with this
growth initiative we created the Emerson Network Power business, which is currently the largest of Emerson's
Brands.

The Emerson Brands
The Emerson Brands are the result of our growth objectives and our repositioning for more customer-focused,
solution-oriented initiatives. Each Emerson Brand is comprised of collaborative groupings of our 60-plus
divisions operating within similar industries, working together to provide integrated solutions that deliver a
competitive advantage for our customers.

Continued Leadership in the New Millennium
Under the leadership of David Farr, named CEO in October, 2000, growth continues to be a top priority.
Emerson is seeking to accelerate its growth through infrastructure expansion in the world's developing
regions, rapid technological development and investment in fast-expanding markets. Operationally, the
company is fostering risk expectance and forward thinking to instill a passion for growth that rivals Emerson's
traditional commitment to continuous improvement.

From its modest beginnings in St. Louis, Emerson has grown to become a global leader bringing technology
and engineering together, serving its customers throughout the world.




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Recent Company News2

First Quarter Results Announced Sales increased 12 percent to $5.6 Billion, earnings per share from
continuing operations increases 26% to .66, operating cash flow increases 29% to $423 million. The 2008
outlook was also reaffirmed.

Emerson CEO Named Among the Best in America Institutional Investor magazine named David N.
Farr, chairman, CEO and president of Emerson, one of "The Best CEOs in America." Farr was ranked the top
CEO in the electrical equipment and multi-industry category.
Emerson Sells Brooks Instrument to American Industrial Partners Emerson sold its Brooks
Instrument unit on December 31, 2007, to American Industrial Partners Capital Fund IV, L.P. (“AIP”) for
approximately $100 million in cash.
Emerson Network Power Introduces New Approach to Data Center Energy Optimization
Emerson Network Power today introduced Energy Logic, a step-by-step roadmap that provides data center
and IT managers with a prioritized approach to reducing energy consumption.
Emerson’s Energy-Saving Technology for Air Conditioning Marks 20 Years Nearly 60 million
energy efficient Copeland Scroll compressors have been installed in air-conditioning and refrigeration systems
and other applications around the world
Emerson Achieves Record 2007 Results Emerson announced record net sales for fiscal 2007 of $22.6
billion, earnings per share of $2.66 and return on total capital of 20.1 percent.
Emerson Signs 10-Year Agreement to Automate Washington Wastewater Treatment Plants
Seattle area's King County standardizes on Emerson's PlantWeb® Digital Architecture for county-wide master
automation plan to improve operations, reduce costs, and maintain compliance
Emerson to Acquire Motorola’s Embedded Communications Computing Business
September 28, 2007 - Emerson will acquire Motorola’s Embedded Communications Computing (ECC) business
for $350 million in cash. Motorola’s ECC business, which had 2006 revenue of approximately $520 million, will
strengthen Emerson’s position in the $6 billion-and-growing merchant embedded computing industry.
Emerson and Cisco to Offer Open Standard Wireless Solutions for Process Industries
September 11, 2007 -- Emerson and Cisco are combining their expertise and technology to deliver wireless
solutions that improve productivity, safety, and operational efficiency for process manufacturing customers.
Emerson Network Power and Dell Release Energy Smart Solutions
The Dell-Liebert Energy Smart Solutions can deliver an 80 percent increase in performance and a 42 percent
reduction in facility power, while maintaining high levels of business continuity and availability.




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    EMR Website

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Company Profile3
Product Offerings
Emerson delivers a broad range of innovative solutions and services to its customers. The leading product
                                                                                      Our leading product
offerings include:

      • Sophisticated process management and automation systems, including the intelligent field
        devices, performance software and consulting and engineering expertise that help ensure
        efficient, safe, and high-quality production of everything from petroleum and chemicals to
        pharmaceuticals and food.
      • Climate control technologies like scroll compressors, communicating thermostats, and electronic
        flow controls that enable environmentally friendly, energy-efficient air conditioning for homes
        and commercial refrigeration systems for businesses.
      • Reliable power technologies such as uninterruptible power supplies, power systems, and
        embedded power supplies that protect business-critical Internet, phone, and computer networks
        from electric power outages and disruptions.
      • Industrial manufacturing solutions that include precision motion control, heavy industrial
        motors, and ultrasonic and plastics-joining technologies.
      • Durable, efficient electric motors for commercial use, which also power residential appliances.
      • A wide range of home and workplace products that provide efficiency, organization, convenience
        and comfort, such as closet and specialized storage systems, food waste disposers, ceiling fans,
        and plumbing and hand tools.


Strategic Focus
Emerson is committed to helping our customers succeed and to building long-term value for our shareholders.
The company focuses strategically on the opportunities presented by four important global issues:

         •   Business without Borders - Emerson operates as a truly global company able to participate in the
             growth of emerging economies by delivering the best possible solution regardless of the project or
             where it resides.
         •   Energy Efficiency - Emerson helps customers extract the most value from available energy
             resources in the most efficient and cost-effective ways by employing innovative thinking and new
             technologies.
         •   Communications Revolution - Emerson provides businesses with the resources they need to ensure
             reliable data, voice, and video transmission from wireless in processing plants to global telecom
             infrastructures.
         •   Resources for the World - Emerson develops new and more efficient technologies to protect scarce
             assets and optimize productivity of vital energy resources.




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    EMR Website

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Growth Initiatives

Emerson's passion for progress is reflected in our disciplined planning and management process that
enables the company to anticipate changing economic and industry conditions, thereby putting the
company in position to create value for customer and shareholders.

Since 2000, Emerson senior management has pursued four long-term strategic imperatives to meet
customer needs, drive higher profitability levels, and provide superior value creation for shareholders:
strengthen our business platforms, pursue technology leadership, globalize our assets, and drive business
efficiency.

Strengthen business platforms

Emerson is committed to creating global brand platforms that meet our customers' needs around the
world and to position our businesses to benefit from favorable industry dynamics. Moreover, our
business platforms are collaborating to create new market opportunities.

Emerson has made a special commitment to invest in long-term strategic initiatives that are the engines
for our growth: establishing and growing our presence in emerging market countries ... expanding
solution and service offerings to enhance customer value ... meeting the needs of our key regional
customers to help them grow ... maintaining and strengthening our leadership positions in scroll
compressor technology, telecom solutions, primary and backup power generation technologies, and
PlantWeb™ digital architecture ... and strengthening our presence at big box retailers.

Pursue technology leadership

Emerson's long history of technology investment and product category leadership has provided the
company with a competitive advantage and market differentiation for our customers. We have
established engineering resources around the world that allow us to work seamlessly 24/7 to bring new
products and technologies to market.

We are committed more than ever to developing game-changing products and technologies. Listening to
our customers is essential to helping us deliver truly unique and innovations solutions that make an
impact on their success.

Emerson's new product and technology investments continue to pay off and are fundamental to our key
growth initiatives. In 2005, Emerson had $5.2 billion in new product sales. In 2006, new product sales
increased to $6.8 billion (or 34 percent of sales). Our long-term goal is to have new products account for
40 percent of sales.




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Globalize assets

We have aligned our company's global operations to meet our customer needs and to help penetrate
emerging markets. Diversifying the geographic presence of the company serves to help enhance our
growth profile. We are committed to maintaining and growing our market leadership in North America
and western Europe. At the same time, we see emerging markets in Asia, the Middle East and Africa,
Eastern Europe, and Latin America playing an ever increasing role in our future growth opportunities. We
continually reposition our assets to drive profitability improvements and to better serve our customers.

Drive business efficiency

Emerson's management team puts a priority on operational excellence, improving capital efficiency and
generating a strong cash flow. We use global best-cost sourcing and cross-functional, sharing of expertise
of our supply chain vendors to help drive greater business efficiency. We continually seek to improve our
manufacturing processes, distribution logistics, and on-time delivery performance to exceed customer
expectations.



Company Promise
Emerson's brand values are expressed in "who we are," the company's promise to our shareholders,
customers and employees alike: Emerson is where technology and engineering come together to create
solutions for the benefit of our customers, driven without compromise for a world in action.

Emerson's brand values are deeply rooted within the company and reflect:

    •      Our internally disciplined character - a well-managed, results-oriented, engineering-driven
           organization whose people have a passion for excellence, commitment, and performance; and
    •      Our externally focused vision - a company whose people strive to be better partners with
           customers and are connected, forward-looking, and have customer focus.

The brand values and brand promise express how Emerson's world-class people engineer and create
superior technology and are driven to collaborate, cross-sell and offer better service for our customers.




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Business Segments4
Process Management-The Process Management
segment offers customers product technology, as well
as engineering and project management services for
precision control, monitoring and asset optimization
of plants that produce power or that process or treat
such items as oil, natural gas and petrochemicals, food
and beverages, pulp and paper; pharmaceuticals, and
municipal water supplies. During the fiscal year ended
September 30, 2007, United States contributed 34%,
Europe contributed 24%, Asia contributed 20% and
other regions contributed 22% under this segment.

Industrial Automation-The Industrial Automation
segment provides integrated manufacturing solutions
to customers at the source of manufacturing their
own products. Products include motors,
transmissions, alternators, fluid controls and materials
joining equipment. In fiscal 2007, United States
contributed 41%, Europe contributed 41%, Asia
contributed 10% and other regions contributed 8% in
this segment.

Network Power-Emerson's Network Power segment
designs, manufactures, installs and maintains products,
providing grid to chip electric power conditioning,
power reliability and environmental control for
telecommunications networks, data centers and other
critical applications. Products in this segment include
power systems, embedded power supplies, precision
cooling and inbound power systems, along with 24-
hour service. In fiscal 2007, sales by geographic
destination for this segment were United States 43%,
Europe 20%, Asia 27% and other regions 10%.

Climate Technologies-The Climate Technologies
segment provides products and services for all areas
of the climate control industry, including residential,
commercial and industrial heating and air-
conditioning, and commercial refrigeration. The
segment also digitally controls and remotely monitors

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    Reuters, EMR Annual Report

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refrigeration units in grocery stores and other food distribution outlets for freshness and food safety. In fiscal
2007, sales by geographic destination for this segment were United States 57%, Europe 16%, Asia 17% and
other regions 10%. Climate Technologies segment make sales to original equipment manufacturers (OEM)
and end users, through global direct sales force networks.

Appliance and Tools-Emerson's Appliance and
Tools segment includes a range of products and
solutions in motors, appliances and components,
tools and storage. In fiscal 2007, sales by geographic
destination for this segment were United States 76%,
Europe 13%, Asia 4% and other regions 7%.


Revenue Breakdown5




         International destination sales, including U.S. exports, totaled $11.6 billion in fiscal 2007, representing
52 percent of the company's sales. This marks the first time the company's international sales have surpassed
its U.S. sales. Sales by business segment are fairly even with process management contributing the largest
amount to sales at 25%.


    Looking at revenue growth geographically,
    international sales have grown much faster than
    U.S. sales over the past 5 years. Sales growth
    internationally has been 15.3% compounded
    annually, compared to 6.3% annual growth
                            6
Management
    domestically over the same period.


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    EMR Annual Report

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David N. Farr       Chairman, Chief Executive Officer, and President

David N. Farr has served as CEO of Emerson since October 2000 and was named
chairman in September 2004. He is only the third chief executive of Emerson in
the past 50-plus years. He assumed the title of company president in November
2005.

Under Farr's leadership, Emerson has grown its position in global markets,
increased its focus on customer-oriented services and solutions, and invested in
industry-leading technologies to enhance its long-term growth and market
position. With his management team, Farr has kept the company focused on
creating long-term value and maintaining Emerson's solid financial performance
relative to growth in sales, earnings, cash flow, and return on capital.

Farr joined Emerson in 1981 in a corporate staff position. He subsequently served as the company's manager
of investor relations, vice president of corporate planning and development, president of the Ridge Tool
division, and group vice president for the industrial components and equipment business. He then served four
years as the Hong Kong-based president of Emerson Electric Asia-Pacific and chief executive officer of
Emerson's Astec joint venture. In 1997, Farr returned to St. Louis to become executive vice president
overseeing Emerson's process management business. In May 1999, he became senior executive vice president
and chief operating officer with responsibility for the firm's global operations, positions that he held until
being named Emerson's CEO in 2000.

Walter J Galvin        Senior Executive Vice President and Chief Financial Officer

Walter J. Galvin has served as Emerson's CFO since 1993. He became an executive
vice president of the company in 2000 and was promoted to senior executive vice
president in 2004. He has served as a management member of Emerson's Board
of Directors since 2000.

Galvin joined Emerson in 1973 and served as the controller at the Ridge Tool
subsidiary. In 1978, he was promoted to assistant vice president of investor
relations at Emerson. In 1981, he became vice president of finance at Emerson's
U.S. Electrical Motors division and was later named its executive vice president of
finance and administration. Galvin returned to the corporate headquarters in 1984 as vice president of
financial analysis and systems, and was later promoted to senior vice president and controller.




Charles A. Peters        Senior Executive Vice President



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As a senior executive vice president at Emerson, Charlie Peters is responsible for
helping Emerson businesses and divisions develop innovative global business
models and strategies that build the company's capabilities to support and create
value through its customer relationships. He is also responsible for coordinating
the information technology, marketing and customer support programs that
provide a foundation for implementing these initiatives. Peters has served as a
management member of Emerson's Board of Directors since 2000.

Peters joined Emerson in 1975 as an engineering cooperative student at its
Browning division in Maysville, Ky. He moved to corporate planning in 1978 and
later served in management positions at several divisions, including as advanced planning manager and
director of strategic planning for Skil power tools and president of the Harris Calorific welding equipment
division.

Edward L. Monser           Chief Operating Officer

Edward L. Monser has served as chief operating officer (COO) of Emerson since
November 2001. As COO, Monser is responsible for Emerson's day-to-day
business operations, global supply chain and international business activities,
which includes business development, investments, and strategic planning.
Monser has more than 25 years of experience in senior operational positions at
Emerson and has played key roles in globalizing the company.

From 1996 until becoming COO, Monser was president of Emerson's Rosemount
division. Under his leadership, Rosemount developed a range of innovative
“smart” measurement and analytical devices for the process industry, expanded its service and solutions
capabilities, and implemented significant operational efficiencies.

Craig W. Ashmore           Senior Vice President, Planning and Development

Craig Ashmore, senior vice president for planning and development, manages
Emerson's strategic planning, mergers and acquisitions, and corporate technology
functions, as well as Emerson Network Power's connectivity solutions business. He
has held these responsibilities since 2004. In October 2007 he was named a
member of Emerson's Office of Chief Executive, the company's top management
team that sets global strategy.

Prior to his current position, Ashmore served as group vice president of Emerson
Telecommunication Products and from 2001 to 2003 was vice president of
corporate profit planning. He previously was president of the Fisher Regulators and Fusite divisions and before
that served as director of investor relations. He joined Emerson in 1991 as a strategic planner and early in his
career held a number of marketing and management positions.


Investor Relations

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We have been awaiting reply from EMR’s investor relations office and will distribute their response to the
following questions as soon as we receive them.

      1. Your 2008 forecast was for 9%-11% top line growth. A good portion of that was based on your expectations for
         favorable foreign currency translation. Roughly what percentage of that “favorable foreign currency translation”
         was based on your expectation of the dollar appreciating relative to the Great British Pound and the Euro? Or
         was that not included in those expectations (in other words, was dollar appreciation relative to the EUR and GBP
         imbedded in those expectations)? Also, what are your expectations for global growth in this forecast?

      2. In regards to your exposure to Emerging Markets, who are your primary customers? Primarily government-run
         companies? Or private sector companies? Also, do you find that you face more competition in EM?

      3. What percentage of your revenue do you ultimately want to be made up of sales to Emerging Markets?

      4. Have you considered spinning off Climate Technologies or Tools & Appliances segments? Would you potentially
         ever consider this?

      5. Have you thought about diversifying Climate Technologies and Tools & Appliances more aggressively outside the
         U.S.?

      6. Do you believe Network Power and Process Management could sustain its growth if global growth slowed down?

      7. Who do you consider your closest competitors? How do you view you effectively compete against them?

      8. How do you hedge against foreign exchange rate risk? Or do you?

      9. Do you believe 4% gains on top of underlying sales via acquisitions and divestitures and foreign currency
         translation can be sustained over a longer-term horizon?

      10. What do you consider to be the most important variables for driving the firms’ growth? How about for each of
          the business segments?

      11. How do you plan to offset rising real wage and commodity price pressure? Do you hedge it in the futures market?
          Or do you simply rely on future gained efficiencies and lowering unit costs via rising sales volume? Also, do you
          expect commodity price pressure to continue to be a problem looking forward? And is there a number that you
          could give in terms of expected real wage growth that the company is expecting to pay out?




Analyst Recommendations and Ownership7
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    Reuters, MSM Money

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Analyst Recommendations

1-5 Linear Scale                               Current          1 Month Ago             2 Months Ago         1 Year Ago
BUY (1)                                             8                     9                      10                     7
OUTPERFORM (2)                                      3                     3                        3                    3
HOLD (3)                                            6                     6                        5                    9
UNDERPERFORM (4)                                    0                     0                        0                    0
SELL (5)                                            0                     0                        0                    0
No Opinion                                          0                     0                        0                    0

Mean Rating                                       1.88                  1.83                    1.72               2.11


        Currently, of the seventeen analysts covering Emerson, eight of them rate Emerson as a buy. Three
other analysts currently project Emerson to outperform the market, but are not confident enough to rate the
stock a buy. The remaining six analysts recommend holding Emerson under the current market and company
conditions. No analysts have in the past year recommended a sell of Emerson or projected the stock to
underperform the market. We view these figures as both a positive and a negative. Although the confidence in
EMR is reassuring, when everyone is positive, it raises the risk that the firm underperforms expectations.

Ownership

      Ownership Information                 Of the 789 million shares outstanding, slightly over 70 percent of those
    Shares Outstanding         789.00 Mil   shares are held by institutions. Having institutions holding such a large
 Institutional Ownership (%)     70.06      percentage of the shares could be a testament to the stable
   Top 10 Institutions (%)       25.00      performance of Emerson in the past. However, it is also nice when
 5%/Insider Ownership (%)         .73       institutional ownership is low, as that can be the “wind at your back,”
           Float (%)             99.27
                                            so to speak. The percentage of shares owned by insiders is less than 1
                                            percent. We would prefer this being higher, although the quality of
                                            management and their consistency in terms of creating shareholder
                                            value reduce our concerns.




Macroeconomic/Industry Outlook
EMR is highly levered to several key macroeconomic variables:

Global Growth:
                                                                                                           14 | P a g e
Global growth plays a key role in determining underlying sales growth, particularly for the Process
Management (approx. 25% of total sales) and Industrial Automation (approx. 18%). The fact that these two
segments have been major drivers of revenue growth in recent years indicates the importance of the outlook
for global growth on EMR’s top and bottom line.

Cyclical Outlook: Although we expect real global growth to slow considerably from its recent trend of 5.2%
due to global financial volatility and a slowing U.S. economy, we believe it will – in both 2008 and 2009 -
remain north of the 2.5% it bottomed out at after the bursting of the tech-bubble8. This is largely due to
considerable momentum and burgeoning aggregate demand in several Emerging Market economies. Indeed,
while we believe economic activity will slow noticeably in the U.K., Japan, and the EU, we anticipate that select
EM nations – such as the Middle East, Brazil, and Russia - will continue to grow at a solid clip. The largest
downside risk to this outlook is Eastern Europe, as considerable current account deficits and large private
sector borrowing in non-domestic denominated currencies in recent years leave it susceptible to currency
volatility and sudden foreign investment outflows. This, however, is merely a fat-tail risk, and we do not
expect said risks to materialize.

Secular Outlook: Despite the cyclical slowdown that we believe the global economy is currently entering, our
secular forecast is for the global economy to continue to grow at a roughly 4%-5% annual rate9. Much of this
will likely be the by-product of continued growth in Emerging Market nations, as the virtuous cycle that is
globalization – along with favorable demographic trends - continues to work its wonders. Economic activity
should also be supported by an eventual rebound in the U.S. and other developed nations. Risks to this
outlook include increased protectionism (particularly if such protectionism eventually led various nations to
withdraw from the global economy); sharp reversals of global imbalances; economic overheating (and the
likely subsequent aggressive tightening of monetary policy) in various emerging market nations; and policy
mistakes, among other unknown risks. However, activity cooling down somewhat over a cyclical horizon could
be healthy for the global economy over a secular term, potentially easing current inflation pressures to some
degree and setting the stage for solid growth to continue. However, we view the distribution of risks to future
inflation to be skewed to the upside over the coming three-to-five years, as a slowdown in the rate of increase
in productivity growth and growth in the effective global labor supply force relatively tighter monetary policy
to achieve a given inflation rate.

EMR Divisions Most Tied to Global, EM Growth: Process Management & Industrial Automation
EMR Divisions Most Tied to U.S. Economy: Climate Technologies & Tools & Appliances
* Note: EMR’s Tools & Appliances is highly levered to U.S. housing. Climate Technologies is, too, although to a
lesser extent


Global Gross Fixed Investment:
Closely tied to global growth is global gross fixed investment. Indeed, according to the Federal Reserve’s
FRB/GLOBAL model, global growth can have an accelerator effect on global gross fixed investment. Thus, to
the extent that global growth remains strong, this can help induce strong global gross fixed investment as well.
Given this relationship, we anticipate global gross fixed investment to slow somewhat over the coming cyclical
horizon. Indeed, anecdotal evidence suggests that this slowdown began occurring in December of 2007, with
the abruptness of this downshift increasing the downside risks to this forecast. However, over a secular
8
    IMF estimates that global growth will come in at 4.1% for 2008
9
    This is in real terms
                                                                                                     15 | P a g e
horizon – as emerging market central banks and governments begin to diversify their foreign exchange
reserves outside of treasuries, as nations continue to open their borders and as wealth continues to rise – we
anticipate global gross fixed investment will pick up. Indeed, gross fixed investment has lagged since 2001, as
lingering effects from the bursting of the tech-bubble and the Asian currency crisis has muted aggregate
demand outside of the U.S. We expect these effects to slowly dissipate, as continued global growth positively
affects firms’ demands for capital goods. In addition, we expect spending on energy and industrial
infrastructure to be very robust in coming years. Indeed, the Middle East alone has plans to spend over $1
trillion on infrastructure in coming years10. EMR has the potential to benefit from this trend as well.

EMR Divisions Most Tied to Fixed Investment: Process Management, Industrial Automation & Network Power


Energy Prices:
Although EMR provides products and services to a vast array of customers, higher energy prices can have a
beneficial impact on revenue and earnings growth. This can be seen in the fact that growth in their Process
Management & Network Power divisions have been buoyed in recent years by strong worldwide growth in oil,
gas and power projects. In addition, higher energy prices creates demand for the companies Industrial
Automation products and services, as firms explore ways to increase productivity to offset rising commodity
prices. Finally, strong global growth is currently positively correlated to rising energy prices, given that a major
fundamental variable pushing energy prices higher is rising demand for commodities from rapidly growing EM
nations like China and India. That being said, commodity price inflation can put pressure on EMR’s operating
margins, although thus far they have done a good job of keeping costs down.

Cyclical Outlook: Our expectations for global growth to slow down to some degree likely hints at some
downward pressure on energy prices over the coming cyclical horizon, although we do not anticipate a drastic
fall in said prices.

Secular Outlook: Supply and demand trends – as well as our longer-term11 outlook on global inflation - likely
support energy prices over the coming secular horizon.

EMR Divisions Most Tied to Energy Prices: Network Power & Process Management



The Dollar:
In recent years, favorable exchange rate movements – specifically dollar depreciation - have added noticeably
to EMR’s top line. For example, foreign currency added 5% to the firms’ sales in 2007. Given EMR’s rapid
expansion into Emerging Markets in recent years – EM made up 33% of the firms revenue in 2007 – this
indicates that EMR is increasingly subject to foreign exchange risk. Higher cash flow volatility, in turn, can
cause investors to discount back those future earnings at a higher rate, thus negatively impacting the firms
underlying value.

USD-EUR & USD-GBP: With the Fed nearing the end of its interest rate reduction cycle while the BOE and the
ECB just begin to loosen monetary policy12 – and given that these developed nations have had to bear the

10
     http://www.ameinfo.com/145251.html
11
     Five years and out
                                                                                                        16 | P a g e
brunt of the dollars’ fall in recent years – we expect the dollars’ rapid decline against the EUR and the GBP to
come to an end in 2008. Over the long-run, however, there are no fundamental variables that overwhelmingly
indicate that the USD-GBP or the USD-EUR are dramatically out of line.


USD-Emerging Market Currencies: Over the long-run, we believe various emerging market currencies will
continue to appreciate noticeably against the dollar. The reasons for this include: a) record current account
surpluses in many EM nations, as compared to an unbelievably large U.S. current account deficit; b) foreign
exchange reserves in the hundreds of billions for many EM nations; c) fiscal surpluses in many EM nations, as
compared to the consistent deficits run by the U.S. government. In addition, many EM nations – with their
youthful populations & lack of promised liabilities – won’t have to face what the U.S. will in terms of rapidly
changing demographics and tremendous unfunded, promised liabilities; d) some EM nations are much more
energy independent than the U.S., which means lower pressure on future current account balances as well; e)
many EM currencies are commodity currencies that should do well when commodity prices rise; f) higher oil
prices means that income from oil importers like the U.S., China, and Europe are transferred to nations that
export oil, like the Middle East. Oil exporters have a lower demand for U.S. goods than do those from whom
they are receiving this income. This, in turn, hints at long-term dollar depreciation as long as commodity prices
stay elevated; g) growth is the major determinant of asset prices. Thus, nations experiencing faster trend
growth – which many EM nations are, as compared to the U.S. – should experience appreciating currencies
relative to the U.S.; h) these current account surpluses, fiscal surpluses, and improved monetary and fiscal
policymaking are likely to lead many EM nations to benefit from credit upgrades. These upgrades, in turn, will
aid currency appreciation; i) capital market deepening aids domestic currencies, and it should do the same for
EM currencies in coming years; j) foreign central banks – given their current situation of dollar and Treasury
saturation – have stated that they will slowly begin diversifying their foreign reserves into non-dollar, non-
Treasury assets. This, in turn, will put downward pressure on the dollar at the margin, and upward pressure on
various emerging market currencies; k)finally, many EM nations have been artificially inflating the value of the
dollar relative to their domestic currencies via policy regimes like exchange rate targeting. Given the political
and economic pressure being placed on these exchange rate regimes, it is likely that these regimes will begin
targeting the dollar less (maybe moving to a basket instead), which likely indicates that their currencies will
appreciate relative to the dollar over time.

Conclusion on Exchange Rate Risk: Although increased exchange rate volatility may have negative effects on
the firms’ revenue that is generated in Europe over the coming cyclical horizon, over the long-run, we view the
exchange rate exposure as being very positive. Indeed, EMR appears to be a solid play on a weakening dollar
versus various EM currencies, given that EM revenues now make up approximately 33% of the firms revenues.
To the extent that the appreciation of EM currencies relative to the dollar is sustained, the risk premium
associated with this particular exchange rate exposure should decrease, thus aiding EMR’s value in the market
place as investors discount future expected EM-based cash flow back at a lower rate. In the end, we view the
long-run risk actually laying with holding the DOLLAR relative to these EM currencies, as compared to holding
EM currencies relative to the dollar. To the extent that these currencies still have risk premiums attached to
them relative to the dollar, this appears to be easy alpha.



U.S. Real Estate
12
     This can be done verbally or through explicit action via reductions in their target rates.

                                                                                                     17 | P a g e
EMR’s Tools & Appliance division is highly levered to the well-being of the U.S. real estate market; their
Climate Technologies segment is highly levered to the U.S. economy, which in turn is levered to U.S. real
estate; and the U.S. economy, in general, is still a major determinant of global growth. Thus, U.S. real estate –
be it directly or indirectly – plays a noticeable role in EMR’s top and bottom line growth.

Cyclical Outlook: We believe the credit crisis will cause housing market woes to intensify, with house price
deflation and sales volume declines accelerating into 2008. In reaction, declines in housing starts will
accelerate as homebuilders attempt to reduce inventory-to-sales readings, although the rapid decline in sales
volume will initially inhibit them from accomplishing this goal. We expect housing starts to bottom sometime
in 2008, although we expect prices to continue to decline through 2009.

Secular Outlook: Eventually, U.S. real estate prices will stop declining. At that point – as an inflation sensitive13
real asset – the outlook for real estate should be respectable, although one should not expect to see what we
saw between 2001 and 2006 potentially ever again14.


Globalization
In the end, what has truly been driving all of the trends discussed above has been globalization. The
movement towards freer markets, technological & financial innovation, improved fiscal and monetary
policymaking, and the luck that has accompanied the global economy over the past two decades have all been
endogenous variables in this global model, acting as accelerator mechanisms to create the blissful
combination of rising global growth and falling inflation and interest rates. And while many of these affects
have already been discussed, another impact of globalization has rising competition. This – when combined
with rising commodity prices, which puts pressure on operating margins - has forced companies to become
increasingly efficient.
        All this heightened competition, the rising importance of using inputs more efficiently while – at the
same time – producing a higher quality product, and the second round effects of rising productivity15 have
created incredible demand for EMR’s highly skilled engineers, and thus for the goods and services provided by
EMR. Although there are risks to globalization – rising protectionist sentiment & populist sentiment included –
we believe that globalizations’ momentum will continue for the next 3-5 years, benefiting EMR in the process.

Conclusion on Macroeconomic Trends: In total, we view the company’s global exposure as very positive. We
somewhat wish the firm would spin-off Tools & Appliances & Climate Technologies, although – if the firm
were to expand these segments more into EM as well – they could prove valuable growth-oriented business
segments as well.


SWOT Analysis
Strengths:
13
   By “inflation sensitive” we are not implying that real estate is negatively impacted by inflation. Rather, we are implying that real
estate returns are sensitive to inflation, actually in a positive way. Rising inflation means rising land prices, holding all else equal
14
   Side note: in a year or two, we actually believe residential real estate might be a good buy, given market tendencies to overshoot
to the downside just like they overshoot to the upside
15
   Rising productivity – over the long-run - boosts asset prices, entices further investment, and puts upward pressure on real wages.
These effects, in turn, increase aggregate demand, which puts further pressure on input costs, thus further squeezing margins unless
firms are able to find other efficiencies to take advantage of
                                                                                                                          18 | P a g e
   -   Expanding presence in Emerging Markets allows SMF growing access to some of the fastest growing
       regions in the world with long-term favorable demographic trends.
   -   Top line growth should be aided over a secular horizon by favorable macroeconomic trends, which the
       company is well positioned to benefit from.
   -   Allows SMF exposure to non-dollar denominated currencies, specifically emerging market currencies.
       SMF is currently lacking such exposure.
   -   EMR is a very well run company, and management has clearly and consistently demonstrated that they
       understand how to create shareholder value.
   -   EMR’s stock of knowledge – as represented through their workforce of top-notch engineers – is
       considerable, and their access to this knowledge gives EMR an advantage over its competitors. In
       addition – given the incredible demand for the services provided by engineers, and given the shortage
       of engineers world wide – this should put a premium on EMR’s services.

Weaknesses:
   -   Given that they are well positioned for growth over the coming secular horizon, it has received
       increasing attention from both institutional and noninstitutional investors in recent years, which could
       indicate that it is now fairly valued.
   -   A large amount of their top line growth has come from favorable exchange rate movements. Although
       we expect the dollar to continue to depreciate against various emerging market currencies over the
       long-run, there is uncertainty surrounding how much growth dollar appreciation against the GDP and
       the EUR would take away from EMR’s top line.
   -   EMR’s Tools & Appliances and Climate Technologies section is highly levered to the U.S. economy, with
       the former specifically being highly levered to U.S. housing. We anticipate that housing prices will likely
       continue to decline through 2009, which will likely continue to hinder sales growth in said divisions
       over the coming cyclical horizon.
   -   Given the cyclical nature of their business lines, EMR’s top and bottom line are highly levered to global
       growth. Thus, the firms well being – and thus the shareholders well being – is largely driven by
       macroeconomic outcomes.

Opportunities:
   -   EMR has not even begun to expand their Tools & Appliances and Climate Technologies businesses
       outside of the U.S. Thus, there is considerable room for expansion there.
   -   EMR just began expanding their presence into emerging markets a few years ago. Given their success
       in taking market share in key hot spots like China, the firm has ample room for additional market
       penetration, as well as room to tap into currently untouched markets.
   -   Although they provide a variety of services that have and will likely continue to benefit from the
       tremendous global infrastructure needs, the firm could continue to expand the services and goods they
       provide to tap into this tremendous demand.
   -   Although we view this as being unlikely, the firm could spin off their Tools & Appliances - and
       potentially their Climate Technologies segment as well – to allow investors a more pure play on the
       powerful macroeconomic trends currently in place, as well as robust Emerging Market growth.




Threats:

                                                                                                      19 | P a g e
     -   Given the shortage of engineers and the strong demand for their services globally, wage pressure has
         been considerable for virtually all companies that offer services similar to EMR. Rising commodity
         prices have put further pressure on the firms margins, although – so far – EMR has been able to offset
         said pressure.
     -   Given the rising returns realized by firms such as EMR, there are increasing risks of new players coming
         into the field. Even more likely, however, is continued expansion by existing players into new areas,
         thus heightening competition and putting downward pressure on the prices firms can receive for their
         products and services.
     -   There is a rising risk of a global “hard landing” over the coming cyclical horizon. This, in turn, indicates
         that there is a rising risk of disappointing earnings and sales performance by the firm.
     -   To the extent that governments around the world entertain the rising protectionist sentiment voiced
         by some of their constituencies, there is a risk that the global macro backdrop will not be as robust as
         currently thought. In fact, if such protectionism is put into action, then the powerful and beneficial
         trend known as globalization could be halted.
     -   There is uncertainty surrounding how global imbalances will unwind in coming years, which indicates
         further risks surrounding the secular global macro outlook.




Porter’s Five Forces
Supplier Power:         Moderate. We anticipate continued cost pressure.
The basic inputs in EMR’s production function are: a) engineers & “knowledge/technology”; b) raw materials;
c) capital16
    - “Effective Labor Force”:
             o Engineers: In recent years, engineers’ skills have been in very high demand, while their global
                supply has been very limited. This, in turn, has increased their power in the labor market,
                effectively putting upward pressure on real wages. If not offset by productivity gains greater
                than or equal to the real wage received by these engineers, then our expectations that these
                real wage pressure will continue into the future indicate that there is potential for EMR’s profit
                margins to be squeezed in coming years.
             o “Knowledge/Technology”: Despite the aforementioned real wage pressure, we do expect the
                firm will be able to offset at least some of this via “knowledge” acting to increase the “effective
                labor force” of the firm. Indeed, the majority of the firms’ revenues have been generated in
                recent years by relatively new products. Thus, while rising real wages could put pressure on
                profit margins, we view productivity gains as likely keeping pace with these real wage increases.
    - Raw Materials: EMR’s suppliers of raw materials do battle in a highly competitive industry, which helps
        reduce suppliers pricing power. However, rising global prosperity has led to rising end demand, which
        in turn has led to rising demand for inputs, specifically raw materials. When combined with uncertainty
        surrounding the long-run supply outlook for these same inputs, this has led to rising real raw material
        prices. Although a cyclical slowdown could help dampen raw material inflation to some degree, long-
        term trends likely point towards some degree of continued raw material price inflation.

16
  We view “knowledge/technology” as labor-augmenting. Thus, “knowledge/technology” and engineers enter our production
function multiplicatively, with gains in output from given quantities of capital and labor representing “technological progress”. Note
that: (“knowledge/technology”) * (engineers) = “effective labor force”
                                                                                                                         20 | P a g e
   -   Capital: Recent levels of real interest rates around the globe would indicate that the net marginal
       product of capital has remained fairly low in recent years. We anticipate this to continue to be the case
       over the coming cyclical horizon – due to the expected cyclical slowdown – although we expect it will
       rise over the coming secular horizon.

Buyer Power:     Weak
   -   Given EMR’s diverse array of business segments and products, their global reach, and their
       considerable size, and the demand for engineers (as well as the shortage of engineers world-wide), no
       buyer holds considerable power over EMR.
   -   To the extent that some of their sales are made to government-run firms in places like China, this could
       reduce their pricing power with a few select customers.
   -   Given the high level of competition EMR faces – although no single buyer holds considerable power
       over the firm – the firm does not hold truly significant pricing power, either.

Barriers to Entry:   Moderate
   -   The limited supply of engineers likely makes it harder for firms to gather up enough engineers to
       compete on a large basis to any significant degree.
   -   Experience and long-standing relationships certainly count for something, newly found firms from
       taking over significant market share.
   -   A rising number of firms have begun to expand their reach globally. To the extent that these firms
       create similar products to EMR, this could bring new competition to markets not previously occupied
       by many Western firms.
   -   The quality of EMR’s products likely gives them some edge over the competition, creating somewhat of
       a barrier to entry, given that entry requires an outside firm to initially view high returns as being
       somewhat likely.

Threat of Substitutes: Weak
   -   Globalization is likely here to stay. Thus, firms will continue to be forced to try and boost productivity
       and improve the quality of their outputs via technological enhancements, which is essentially what
       EMR provides.
   -   The goods provided by EMR are basic needs in production.
   -   To the extent that an entirely new, better “mousetrap” is created, this could create the potential for
       substitutes. However, given that the firm is in the process of creation, they’d likely be one of the firms
       benefitting from any substitution away from current products/services.

Degree of Rivalry:      Fairly High
   -   Anyone that competes on a global scale usually faces fairly high competition.
   -   There are a number of competitors in each of the firms end markets.
   -   However, few firms compete in such a vast array of product markets, and on such a global scale as
       EMR.




Ratio Analysis
                                                                                                      21 | P a g e
Extended DuPont Analysis

                                              Extended DuPont Model
                    ROE             Net Profit Margin       Total Asset Turnover         Equity Multiplier
             2007   24.16%      =               9.46%   x                    1.14   x                 2.24
             2006   22.65%      =               9.16%   x                    1.08   x                 2.29
             2005   19.15%      =               8.22%   x                    1.00   x                 2.33
             2004   18.56%      =               8.05%   x                    1.02   x                 2.26
             2003   16.83%      =               7.80%   x                   0.918   x                 2.35

             HON    24.28%      =              6.64%    x                   1.01    x                3.62
             ROK    32.67%      =             11.38%    x                   1.10    x                2.61
             ABB    22.96%      =              5.69%    x                   0.97    x                4.16
              SI     6.78%      =              2.62%    x                   0.84    x                3.08
             ETN    22.13%      =              7.37%    x                   1.08    x                2.78

         Emerson’s ROE has increased each of the last five years. This increase can be attributed to the
company’s increasing profit margin and asset turnover over this period. Emerson has been able to retain a
higher proportion of revenues as profit over time. The improved asset turnover can be attributed to Emerson
using its assets more efficiency to generate revenue. The equity multiplier has stayed fairly constant over this
time period, meaning that Emerson has not become more dependent on debt to finance its assets over the
last five years. Emerson’s ROE is at least as high as of all its competitors expect for Rockwell Automation.
Rockwell has the best profit margin of the peer group, but ABB Ltd. has the highest equity multiplier.
Emerson’s asset turnover is better than any competitor in the peer group.




Profitability Analysis

                                             Emerson Historical Trends
                                                 2003         2004        2005            2006       2007
            Gross Margin                       35.09%       35.655       35.73          35.60%     35.93%
            Operating Margin                   10.13%       11.86%      12.42%          13.33%     13.76%
            Profit Margin                       7.80%        8.05%       8.22%           9.16%      9.46%
            Return on Assets                    7.17%        7.68%       8.25%           9.89%     10.85%
            Return on Equity                   16.83%       18.56%      19.15%          22.65%     24.16%
            Return on Capital                  12.70%       14.20%      15.50%          18.40%     20.10%




                                                                                                             22 | P a g e
                                           Emerson vs. Competitors
                                     EMR    HON    ROK    ABB             SI    ETN    Peer Avg.
             Gross Margin            35.93% 22.96% 41.91% 28.15%          5.11% 26.84%    24.99%
             Operating Margin        13.76%  9.76% 16.26% 10.59%          6.23%  8.51%    10.27%
             Profit Margin            9.46%  6.64% 11.38%  5.69%          2.62%  7.37%     6.74%
             Return on Assets        10.85%  6.73% 12.52%  5.53%          2.21%  7.99%     7.00%
             Return on Equity        24.16% 24.28% 32.67% 22.96%          6.78% 22.13%    21.76%

        Emerson’s gross profit margin has been extremely consistent over the past five years, but the
company’s operating and profit margins has been steadily increasing over this same time. This is a result of
Emerson cutting costs while improving revenues. Both Emerson’s return on assets and equity has been
steadily increasing as well. This can be attributed to Emerson’s ability to use assets and equity more
efficiently, as returns on invested capital in the company has produced steadily improving returns. Compared
to the peer group average, Emerson has outperformed in all areas of profitability. Only Rockwell Automation
seems to be more profitable.

Profitability Rating: Good




Asset Management Analysis

                                           Emerson Historical Trends
                                                        2003      2004      2005       2006      2007
           Total Asset Turnover                         0.918      1.02      1.00       1.08      1.14
           Fixed Asset Turnover                          4.71      5.32      5.76       6.25      6.58
           Inventory Turnover                            5.82      5.89      6.13       5.83      6.49
           Avg. Collection Period                        69.3     68.54     68.68      67.37     68.89
           Days Sales in Inventory                      62.77     61.93      59.5      62.56     56.21

                                            Emerson vs. Competitors
                                          EMR HON ROK       ABB    SI      ETN   Peer Avg.
           Total Asset Turnover            1.14  1.01  1.10   0.97    0.84  1.08       1.00
           Fixed Asset Turnover            6.58  6.54  9.81   8.68    7.47  5.45       7.59
           Inventory Turnover              6.49  6.59  5.76   4.52    3.06  6.99      5.384
           Avg. Collection Period         68.89 80.93 80.08 117.42   67.64 64.77     82.168
           Days Sales in Inventory        56.21 55.36 63.38  80.74 119.39 52.15      74.204

         Emerson’s total and fixed asset turnovers over the past 5 years have improved. This reflects Emerson’s
ability to more effectively use its assets to produce revenue. Emerson’s inventory turnover has improved as
Emerson has been able to sale inventories at a more rapid pace. The average collection period has stayed
constant over the last five years. This shows that Emerson has not had any significant deviation in its ability to
collect on its receivables. Days sales in inventory has decreased slightly as Emerson has been selling
inventories quicker. Compared to its peers, Emerson’s asset turnover falls in line with the competition.
Emerson’s inventory turnover is slightly better than the competition. Emerson collects its receivables much
faster and has significantly lower amounts of inventory on hand than the competition.
                                                                                                      23 | P a g e
Asset Management Rating: Good




Debt Management Analysis

                                          Emerson Historical Trends
                                                       2003       2004          2005          2006       2007
           Equity Multiplier                            2.35      2.26          2.33           2.29      2.24
           Debt-to-Equity                               0.58      0.43          0.42           0.38      0.38
           Debt-to-Assets                               0.27      0.25          0.24           0.22      0.19
           Times Interest Earned                        6.75      8.91          9.84          12.93      12.9


                                           Emerson vs. Competitors
                                           EMR HON ROK      ABB SI    ETN    Peer Avg.
           Equity Multiplier                2.24 3.62  2.61 4.16 3.08   2.78         3.25
           Debt-to-Equity                   0.38 0.58  0.23 0.52 0.32   0.43         0.42
           Debt-to-Assets                   0.19 0.23   0.2 0.13 0.67   0.64         0.37
           Times Interest Earned            12.9 8.28 13.52 9.00 N/A 11.51          10.58

         Emerson's debt-to-equity and debt-to-assets ratios have both decreased consistently and steadily over
the past 5 years. This shows Emerson's more conservative approach to financing its operations as the
company has lowered its debt levels in the recent past. Emerson's times interest earned has doubled in the
past five years. This reflects the fact that Emerson has become better able to meet its debt obligations during
this period. In relation to Emerson's peers, the debt-to-equity, debt-to-assets, and times interest earned are
slightly better than the average competitor. Rockwell Automaton seems to be the only peer that is less
leveraged than Emerson.

Debt Management Rating: Good




Liquidity Management Analysis

                                          Emerson Historical Trends
                                                2003       2004       2005             2006           2007
               Current Ratio                    1.61       1.49       1.39             1.36           1.45
               Quick Ratio                      1.15       1.09          1.02          0.95           1.05




                                          Emerson vs. Competitors

                                                                                                             24 | P a g e
                                      EMR   HON   ROK ABB   SI   ETN  Peer Avg.
               Current Ratio           1.45  1.15 1.37 1.39 1.10 1.29           1.26
               Quick Ratio             1.05  0.82 1.08 1.07 0.54 0.91           0.88




          Emerson's has become less liquid over the past 5 years as seen through the slight decreases in the
current and quick ratio. This trend can be attributed to the cash outlay made by Emerson to acquire other
companies. Compared to peers, Emerson is most liquid among the peer group. Emerson has the best ability
to pay back its short-term liabilities with its short-term assets. Emerson is able to pay back its short term
liabilities with its most liquid assets as well as any of its peers. This level of liquidity can be attributed to
Emerson's efficient operating cycle and its ability to turn its products and services in to cash effectively.

Liquidity Management Rating: Very Good




Growth Analysis

                                           Emerson Historical Trends
                                                  2004            2005             2006             2007
          Sales Growth                          11.87%          10.82%           16.34%           12.11%
          EPS Growth                            15.40%          14.28%           39.93%           19.07%




                                            Emerson vs. Competitors
                                       EMR      HON    ROK    ABB    SI       ETN    Peer Avg.
          Sales last 4YR               15.43%   12.43% 6.34% 6.35%      3.83% 15.42%    5.02%
          Sales (ttm vs. prior ttm)    12.11%   10.27% 9.83% 10.90%     8.96% 6.55%     6.20%
          EPS last 4YR                 26.79%   27.69% 34.66%     NA -1.40% 39.64%     20.12%
          EPS (ttm vs. prior ttm)      19.07%   25.89% 20.05% 80.38% 21.22% 6.69%      25.26%

        Sales growth over the past 4 years for Emerson has been positive and fairly stable. Growth in earnings
per share has been very positive as well. The largest growth in sales and earnings per share came in 2006.
Compared to the competition, growth over the past 4 year in sales has been better than all of its peers except
for Eaton, where growth has been very similar to that of Emerson's. Eaton and Rockwell have seen their
earnings per share grow at a much faster rate over the recent past compared to Emerson. While Emerson
growth in earnings per share each of the last 4 years has not been as good as some of it peers, its growth has
been the most stable and reliable.

Growth Rating: Above Average




                                                                                                       25 | P a g e
Pro Forma Income Statement
                                            Emerson Electric
                                       Pro Forma Income Statement

                                   Pro Forma - Year Ending 12/31/2009

                                       Pessimistic         Most likely         Optimistic
Probability                               20%                 50%                 30%
Sales growth                             4.50%               7.50%               12.0%
Sales                              $     24,649,188    $     26,084,768    $     28,314,317
EBIT                               $       3,697,378   $       3,912,715   $       4,247,148
Interest expense                        226,800             217,000             207,800
Earnings before taxes              $       3,470,578   $       3,695,715   $       4,039,348
Income taxes                         1,075,879           1,145,672           1,252,198
Earnings after taxes (000)         $    2,394,699      $    2,550,043      $    2,787,150

Diluted Shares outstanding (000)        796,500             780,570             772,605
Pro forma earnings per share       $            3.01   $            3.27   $              3.61
Weighted Forecast for EPS                              $            3.32
Average - Sales                                        $ 26,466,516.70

                                         2010                2011                2012                 2013
Sales Growth                              7%                  7%                  7%                   7%
Sales (000)                        $ 28,319,172.87     $ 30,301,514.97     $ 32,422,621.02       $34,692,204.49
EBIT                                $ 4,247,875.93     $ 4,545,227.25       $ 4,863,393.15       $ 5,203,830.67
Interest expense                       241,800             241,800             241,800               241,800
Earnings before taxes              $ 4,006,075.93      $ 4,303,427.25      $ 4,621,593.15        $ 4,962,030.67
Income taxes                       $ 1,241,883.54      $ 1,334,062.45      $ 1,432,693.88        $ 1,538,229.51
Earnings after taxes (000)         $ 2,764,192.39      $ 2,969,364.80      $ 3,188,899.28        $ 3,423,801.16

Diluted Shares outstanding (000)          775392.75         767638.8225         759962.4343        752362.8099
Pro forma earnings per share                   3.56                 3.87                4.20               4.55




                                                                                                      26 | P a g e
Revenue Forecast:

Cyclical Outlook: For 2008, the firm is currently estimating sales growth in the range of 9%-11%, thanks to
underlying sales growth of 5%-7% and 4% growth due to foreign currency translation, acquisitions and
divestitures. However, given the level of uncertainty surrounding global growth over the coming cyclical
horizon, given the uncertainty surrounding the effects of acquisitions and divestitures, and given the
possibility that the dollar will appreciate relative to the GBP and the EUR17, we decided to break our forecast
down into three distinct potential scenarios: “most likely” (which received a weighting of 50%), “pessimistic”
(which received a weighting of 20%), and “optimistic” (which received a weighting of 30%). We then multiplied
our revenue forecasts by the appropriate probabilistic weights, which resulted in a 2009 revenue forecast of
$26,466,516.70.

Secular Outlook: Over the coming secular horizon, we anticipate global real GDP growth will come in
somewhere around 4%-5%. When combined with continued dollar depreciation relative to various emerging
market currencies, continued penetration by the firm in key emerging markets, and a rebound in the Climate
Technologies and Tools & Appliances divisions, we expect revenue growth to most likely come it at around 7%.
Risks to this estimate lay on both sides, depending on the realized sequence of events. For example, if global
growth remains fairly robust in 2008 and 2009, and global central banks find the rising need to tighten
monetary policy further, then we could experience a policy-driven global slowdown somewhere out in 2011-
2013.


EBIT Margins: Despite rising real wage and commodity price pressures, the firm has done a good job of
maintaining EBIT margins. A major factor in this success has been their ability to reduce unit costs by
increasing sales volume. Given their continued expansion in EM – and our expectations of continued
expansion in coming years – we thus anticipate EBIT margins to remain approximately where they are now,
which is 15%.


Tax Rate: Although a growing percentage of their revenue is coming from abroad (on which the effective tax
rate in 2007 was 27%), we view 31% - which is what EMR’s marginal tax rate has roughly averaged since 2002
– as being reasonable.


Diluted Shares Outstanding: A primary goal of management – something that they have done a good job of
doing throughout their history – is to create shareholder value via “giving back” at least 50% of the cash flows
the company produces to shareholders in the form of share buybacks and dividends. Over the past 10 years,
they’ve reduced float by approximately 1.1%/year, although – in recent years – this annual average has gone
up considerably. Thus, for our “most likely” scenario, we anticipated that they’ll buy back 2.5% of their float in
total over the next two years. Following this, we anticipated that the firm will return to its historical norm and
reduce float by approximately 1.1%/year.




17
     We are uncertain as to whether or not they are including this possibility in their forecast

                                                                                                       27 | P a g e
Multiples Valuation

                                                 Price/Earnings:
                                                                                  5-Year      10-Year
                                  2004 2005            2006           TTM          Avg          Avg

                      EMR          23.5   22.0          19.1          19.1         22.1         21.9
                      ABB          22.6   25.3          40.5          33.0         29.4         36.2
                      ETN          12.8   12.6          15.2          12.6         14.1         16.7
                      HON          20.0   18.0          20.8          19.5         20.4         22.1
                      ROK          26.8   21.4          17.1          15.3         20.9         19.8
                       SI          17.4   22.1          22.6          21.5         21.6         22.0


                Basket Average     20.5   20.2          22.6          20.2         21.4         22.7
                   S&P 500         19.0   17.3          16.8          18.7         18.6          -


       -   Historically, EMR has received about the same trailing P/E multiple from the market as the peer basket,
           which is the case now as well
       -   Currently EMR is trading at a discount to its 5-year and 10-year average, although that is also the case
           for ETN, HON, ROK, and SI. Rapid earnings growth is expected at ABB, which indicates that it’s not too
           out of line
       -   EMR doesn’t appear to be too out of line with the P/E on the S&P 500 either, given that TTM earnings
           for the S&P has been shrunk due to writedowns
       -   EMR’s P/E has trended down over the few years, as is typical for cyclical firms at this stage of the
           business cycle
       -   The lowest multiple it has received on TTM earnings in the past 10 years has been 19.1 (1999, 2006,
           current). This indicates that the firm could be a little cheap based on historic multiples, although the
           current multiple doesn’t deviate so greatly from the 5 or 10-year average to consider it drastically
           undervalued
       -   Given that analysts are estimating that earnings in ’08 will increase 13.5% yoy (increase 10.6% in 2009
           yoy), a forward multiple of 16.83 on 2008 earnings (15.22 on 2009 earnings) seems fairly reasonable

Potential Future Value Based On 10-Year Average P/E Multiple: $3.27 * 21.9 = $71.61
Potential Future Value Based On Current P/E Multiple: $3.27 * 19.1 = $62.46
Potential Future Value Based On 10-Year Low P/E Multiple: $3.27 * 19.1 = $62.46
Potential Future Value Based On 10-Year High P/E Multiple18: $3.27 * 22 = $71.94

Conclusion: Seems to be sitting a little on the low side, although not noticeably undervalued relative to peers.



18
     Excluding 2000-2004

                                                                                                        28 | P a g e
                                                Price/Book:
                                                                              5-Year      10-Year
                                  2004 2005          2006         TTM          Avg          Avg
                    EMR            3.8   4            4.3          4.5          4.2         4.2
                    ABB            5.8  6.2          10.4          8.5          7.0         5.9
                    ETN            2.6  2.7            3           2.5          2.8         2.5
                    HON            2.8  3.8           5.6          5.2          4.0         3.7
                    ROK            4.7  6.7           5.2          4.6          5.0         3.9
                     SI            2.1  2.4           2.3          2.7          2.4         2.3


              Basket Average       3.6    4.3         5.1          4.7          4.2          3.7
                 S&P 500            3     2.8         2.9          3.9          3.2           -


   -   Historically, EMR’s P/B multiple has been slightly above the basket average (10-year), although not
       considerably so. Thus, given that its trading at approximately the basket average currently, this doesn’t
       indicate it being considerably undervalued
   -   Currently, EMR is trading at a premium to its 5 and 10-year average
   -   EMR’s P/B has trended up in recent years, as is typical for cyclical firms at this stage of the business
       cycle. The highest P/B it ever received was 5.2 in 2000. Given that the current P/B is closer to the top
       end of the range than the bottom end, this could indicate that EMR is not being significantly
       undervalued by the marketplace
   -   When compared to the P/B on the S&P500, EMR’s multiple doesn’t seem too out of line, given the
       writedowns we’ve seen of late
   -   The lowest P/B multiple the firm has received in the past 10 years is 3.6 in 2002. Given that 4.6 is well
       above this number, this fails to indicate that there’s some degree of support via historical valuations

Current Value of Firm Based On Historic Book: $11.03 * 4.2 = $46.33

Conclusion: Seems to be potentially sitting a little on the high side, although reasonably valued.




                                                                                                     29 | P a g e
                                                    Price/Sales:
                                                                                  5-Year      10-Year
                                       2004 2005         2006         TTM          Avg          Avg

                          EMR          1.9    1.8         1.8         1.8          1.9           1.9
                          ABB          0.9    1.5         2.6         2.1          1.5           1.1
                          ETN          1.0    0.9         1.2         1.0          1.1           0.9
                          HON          1.2    1.2         1.5         1.4          1.3           1.3
                          ROK          2.2    2.2         2.0         1.7          2.0           1.6
                           SI          0.8    0.9         0.8         1.2          0.9           0.8


                      Basket Average   1.3    1.4         1.7         1.5          1.4           1.3
                         S&P 500       1.6    1.5         1.6         2.6          1.8            -



       -   The firm is currently traded near its 5 and 10-year average
       -   The firm is currently selling for a premium relative to the basket average, as has historically been the
           case. However, that premium has shrunk recently, thanks largely to ABB. Given the rapid growth
           expected at ABB in future years by analysts, this does not indicate that the firm is noticeably
           undervalued
       -   The firm is currently selling at a discount to the S&P500, which is not typically the case. This could
           indicate that the firm is undervalued relative to the market
       -   The firm is trading approximately in the middle of its historical high-low range

Potential Future Value Based On 10-Year Average P/S Multiple: $33.55 * 1.9 = $63.75
Potential Future Value Based On Current P/S Multiple: $33.55 * 1.8 = $60.39
Potential Future Value Based On 10-Year Low P/S Multiple: $33.55 * 1.6 = $53.68
Potential Future Value Based On 10-Year High P/S Multiple19: $33.55 * 2 = $67.10

Conclusion: Could be slightly undervalued relative to the market. Doesn’t appear undervalued relative to peers.




19
     Excluding 2000

                                                                                                          30 | P a g e
                                         Price/Cash
                                            Flow:
                                                                      5-Year       10-Year
                           2004 2005         2006         TTM          Avg           Avg

           EMR             13.4   14.3       14.4         13.5         14.3          14.6
           ABB             19.9   18.9       32.5         26.5         22.0          36.8
           ETN             9.3    8.1        12.9         10.7         10.9          9.5
           HON             13.1   11.8       13.1         12.3         12.8          13.8
           ROK             15.9   17.3       14.7         19.6         16.6          13.4
            SI             11.6   21.7       14.0         8.6          13.2          11.2


     Basket Average        13.9   15.4       16.9         15.2         15.0          15.4
        S&P 500            11.5   10.8       11.1         12.8         11.6           -


       -   EMR’s multiple is currently well below their historical average, thanks largely to their recent surge in CF
           growth
       -   The lowest multiple the firm ever received was 11.8 in 2001, which means that it still has room to fall,
           holding all else equal
       -   The firm is selling for a discount relative to its peer group, as has historically been the case. However,
           the discount is larger than normal, although this could partly be due to timing
       -   The firm is selling for a smaller premium relative to the S&P500 than it has historically.

Potential Future Value Based On 10-Year Average P/CF Multiple: $4.16 * 14.6 = $60.74
Potential Future Value Based On Current P/CF Multiple: $4.16 * 13.5 = $56.16
Potential Future Value Based On 10-Year High P/CF Multiple20: $4.16 * 16.3 = $67.81
Potential Future Value Based On 10-Year Low P/CF Multiple: $4.16 * 11.8 = $49.09


Conclusion: Could be undervalued, although the TTM numbers are likely distorting these figures to some
degree.




20
     Excluding 2000-2003

                                                                                                          31 | P a g e
FCFF Analysis
I.- Calculating FCFF for 2008-2013 [FCFF = EBIT(1-t) + Depreciation – FCInv – WCInv]
Sales Growth, EBIT(1-T): See Pro Forma

Depreciation and Non-Cash Charges: We expect depreciation to continue to grow at a rate of 2.6%/year,
which has been its 10-year historical rate of increase. This relationship can be further understood in that PP&E
has also historically grown at 2.6%/year, and the rate of annual depreciation for given increases in PP&E has
remained 15% throughout the past 10 years.

Incremental Fixed and Working Capital: We use historical relationships to forecast out these figures as well. In
regards to Incremental Fixed Capital, we anticipate that investment will growth approximately 2.6%/year,
which has been the case over the past 10 years. In regards to Working Capital, we found that working capital
over the past 5 years has averaged 10.26% of sales. We exclude years prior to this, as their efficiency in this
regard has improved immensely since the late 1990’s. We then took this number – 10.26% of sales – and
multiplied it by our forecasted change in sales, adding this result to the prior years’ number.

II.- Terminal Value (2013)
For our terminal value, we assumed terminal growth of 5%. We combined this estimate with a variety of
potential discount rates (see below), which left us with various estimates of terminal value. We then
discounted this terminal value back to the present value using the appropriate discount rate.

III.- Discount Back 2008-2013 FCFF, Terminal Value
We did three simulations regarding the discount rate:
      (1) In the first scenario, we set Rf = 5%. We then calculated beta (1.13). Finally, for the equity risk
          premium, we use the historical implied equity premium since 196721, which was 3.93%. Putting these
          numbers together, we get a discount rate of 9.44%
      (2) In the second scenario, we set Rf = 7%. We use the same historical implied equity premium discussed
          above (3.93%), as well as the same beta (1.13). This leaves us with a discount rate of 11.44%
      (3) In the final scenario, we again set Rf = 5% and beta = 1.13. However, for the equity risk premium, we
          use 4.79%, which is the estimate of the equity risk premium based on annualized returns since 1928.
          This leaves us with a discount rate of 10.41%

IV.- Subtract Long-Term Debt, Add Cash & Cash Equivalents
After finding the PV of these figures, we then subtracted long-term debt – which we found on EMR’s balance
sheet to be $3.372 billion – and added back cash & cash equivalents ($1.008 billion). This figure gave us the
PV of FCFE.


V.- Results
       (1) $77.58
       (2) $73.66
       (3) $81.55

21
     Taken from http://pages.stern.nyu.edu/~adamodar/
                                                                                                     32 | P a g e
Three Stage H-Model

Three-Stage “H-Model”:

I.- FCFF Estimates For 2008-2013: see above

II.- “H-Model”:

         For the “H-Model,” we anticipate annual sales and cash flow growth to slow linearly from its initial
level of 7% down to 5% over the span of 7 years. This slowdown begins in 2014, which was chosen because
this is when population aging will begin to take hold at a more rapid rate, slowing global growth in the
process. We use a terminal growth rate of 5%, which is our forecast of nominal growth post-2020.
         Again, we discount this growth using the three different discount rates discussed above. Thus, the
value of the “H-Model” differs for each simulation. We end this valuation by then discounting back the 2013
value of the “H-Model.”


III.- Results:

A.- The current PV of the 2008-2013 FCFF estimates are as follows (using the various discount rates discussed
above):
    (1) $ 14,364,544,000.00
    (2) $ 13,537,403,490.00
    (3) $ 13,938,227,640.00

B.- The current PV of the “H-Model” – which was calculated by discounting back the value we found for 2013 –
estimates are as follows:
    (1) $56,623,203,720.00
    (2) $35,018,813,428.70
    (3) $ 44,074,377,790.00

C.- Adding the PV of the 2008-2013 FCFF and the PV of the H-Model together, dividing this value by the
number of shares currently outstanding, subtract from this per share value the per share value of the firms
long-term debt, and then adding to this the cash & cash equivalents per share, we received the following
valuation estimates:
    (1) $86.16
    (2) $58.00
    (3) $69.87
We View “2” above as being the best indication of value, given that it incorporates an “Rf” and an “equity
premium” more in line with long-term measures.




                                                                                                    33 | P a g e
Risks:
      Analysts and investors alike appear to be anticipating sustained robust top and bottom line growth.
       Such expectations reduce the upside benefit of owning EMR (given that its harder to beat these higher
       expectations, and a beat will likely be priced in to some degree) and also increase the downside risk.
       SMF MUST BE PRICE SENSITIVE!
      There are large downside risks for global economic growth over the coming cyclical horizon. This
       increases the risk that the firm might underperform relative to optimistic expectations
      There are also downside risks for the global economy over a secular horizon. To the extent that EM
       central banks need to significantly tighten interest rates in the future, this could lead to policy-driven
       declines in economic activity
      Rising protectionism is another threat to the global economic outlook, as is rising populism. A
       movement away from the global free market economy is a movement away from long-term global
       prosperity – and away from sustained strong performance from EMR
      Although EMR’s workforce is top notch, there’s always a risk that someone else builds a better
       “mousetrap,” or other firms could potentially steal away EMR’s talent
      There might be greater than expected future revenue and cash flow volatility, which could reduce the
       PV worth of these cash flows
      Analysts are expecting continued large top line increases from acquisitions and divestitures. Obviously,
       there are large risks as to whether or not this can continue to aid growth to the same degree it has in
       recent years
      Exchange rate risks are always something to think about




Summary and Recommendation
In the end, EMR is a terrific company that looks to benefit from future trends. However, given SMF’s mandate
of keeping the long-term in mind, and given the important role purchasing price plays in investment risk, we
recommend a “don’t buy.” The reason for this is that the current price level doesn’t offer enough cushion
against the unknown for us to confidently conclude that EMR has at least a 60% chance of outperforming the
market. Indeed, current expectations are so high that the risk-reward of the stock is not quite as favorable as
we’d prefer. However, should the price fall lower, we would recommend that SMF include EMR into its
portfolio.




                                                                                                      34 | P a g e
Financial Statements22
Income Statement

In Millions of U.S. Dollars                        2007       2006       2005       2004        2003
(except for per share items)                    09/30/07   09/30/06   09/30/05   09/30/04   09/30/03

Total Revenue                                    22,572     20,133     17,305     15,615      13,958

Cost of Revenue, Total                           14,461     12,965     11,122     10,049       9,060
Sell/General/Admin. Expenses,Total                4,593      4,099      3,595      3,281       2,935
Amortiz of Intangibles                               63         47         28         21          17
Amortiz of Acq Costs                                  --         --         --         0           0
Depreciation/Amortization                            63         47         28         21          17
Interest Expense, Net Operating                     261        225        243        234         246
Inter/Invest Inc, Operating                         (33)       (18)       (34)       (24)        (15)
Interest/Expense (In),Net Operating                 228        207        209        210         231
Impair-Assets Held for Use                            --         --         0          3          54
Other Unusual Expnse (In)                            83         84        110        129         141
Unusual Expense (Income)                             83         84        110        132         195
Loss (Gain) / Sale Asts (Oper)                      (74)       (68)       (26)       (27)        (24)
Other, Net                                          111        115        118         97         130
Other Operat Expse, Total                            37         47         92         70         106
Total Operating Expense                          19,465     17,449     15,156     13,763      12,544

Operating Income                                  3,107      2,684      2,149      1,852       1,414

Net Income Before Taxes                           3,107      2,684      2,149      1,852       1,414

Provision for Income Taxes                          971        839        727        595         401
Net Income After Taxes                            2,136      1,845      1,422      1,257       1,013

Net Income Before Extra. Items                    2,136      1,845      1,422      1,257       1,013

Accounting Change                                     --         --         --         0           0
Discontinued Operations                               --         --         0          0          76
Total Extraordinary Items                             --         --         0          0          76

Net Income                                        2,136      1,845      1,422      1,257       1,089

Income Available to Common Excl. Extra. Items     2,136      1,845      1,422      1,257       1,013
Income Available to Common Incl. Extra. Items     2,136      1,845      1,422      1,257       1,089

Basic/Primary Weighted Average Shares               794        817        830        839         838
Basic/Primary EPS Excl. Extra. Items              2.691      2.260      1.713      1.499       1.209
Basic/Primary EPS Incl. Extra. Items              2.691      2.260      1.713      1.499       1.299
Dilution Adjustment                                   --         --        0.0        0.0        0.0

22
     Reuters

                                                                                        35 | P a g e
Diluted Weighted Average Shares                  804             825             838         844        842
Diluted EPS Excl. Extra. Items                 2.657           2.238           1.698       1.489      1.203
Diluted EPS Incl. Extra. Items                 2.657           2.238           1.698       1.489      1.294

DPS - Common Stock Primary Issue                1.05            0.89            0.83        0.80       0.79
Gross Dividend - Common Stock                    837             730             694         675        661

Stock Based Compensation                             --              --             2          6          7
Pro Forma Net Income                                 --              --        1,420       1,251      1,082
Pro Forma Basic EPS                                  --              --        1.710       1.495      1.290
Pro Forma Diluted EPS                                --              --        1.695       1.485      1.285

Interest Expense, Supplemental                   261             225             243         234        246
Depreciation, Supplemental                       525             500             472         478        463



Total Special Items                                  9               16            84        105        171
Normalized Income Before Tax                   3,116           2,700           2,233       1,957      1,585
Effect of Special Items on Income Taxes              3                5            28         34         48
Inc Tax Ex Impact of Sp Items                    974             844             755         629        449
Normalized Income After Tax                    2,142           1,856           1,478       1,328      1,136
Normalized Inc Avail to Common                 2,142           1,856           1,478       1,328      1,136
Basic Normalized EPS                           2.699           2.273           1.780       1.584      1.355
Diluted Normalized EPS                         2.665           2.251           1.764       1.573      1.349


Statement of Cash Flows

                                             2007            2006               2005        2004       2003
                                          09/30/07        09/30/06          09/30/05     09/30/04   09/30/03
Dollars                                                                   Reclassified
(except for per share items)                                                  09/30/06


Net Income                                  2,136           1,845              1,422       1,257      1,089
Depreciation/Depletion                        656             607                562         557        534
Accounting Change                               --              --                  --         --         0
Other Non-Cash Items                           87             212                  93         80       (158)
Non-Cash Items                                 87             212                  93         80       (158)
Cash Taxes Pd, Supplemental                   960             820                600         380        310
Cash Interest Pd, Suppl                       242             214                247         233        245
Accounts Receivable                          (349)           (246)              (261)       (134)         8
Inventories                                    96            (274)                  8         (8)       161
Other Assets                                   36              36                (44)        202         12
Accounts Payable                              104             324                161         123         57
Accrued Expenses                              200              71                  77        114         24
Changes in Working Capital                    137            (152)               110         322        266
Total Cash from Operations                  3,016           2,512              2,187       2,216      1,731

Capital Expenditures                         (681)           (601)              (518)       (400)      (337)
Acquisition of Business                      (295)           (752)              (366)       (414)        (6)


                                                                                               36 | P a g e
Sale of Business                                      106            137              (12)             97            39
Other Investment Cash Flow Items, Total             (189)           (615)           (378)           (317)            33
Total Cash from Investing                           (870)         (1,216)           (896)           (717)          (304)

Financing Cash Flow Items                                  5          32                  15               --         --
Total Cash Dividends Paid                           (837)           (730)           (694)           (675)          (661)
Issuance (Retirement) of Stock, Net                 (853)           (862)           (668)           (121)            11
Short Term Debt, Net                                (800)             89              320           (106)        (1,232)
Long Term Debt Issued                                 496                  6          251              29           746
Long Term Debt Reduction                                  (5)       (266)           (625)            (16)           (17)
Long Term Debt, Net                                   491           (260)           (374)              13           729
Iss (Retirmnt) of Debt, Net                         (309)           (171)             (54)           (93)          (503)
Total Cash From Financing                          (1,994)        (1,731)          (1,401)          (889)        (1,153)

Foreign Exchange Effects                                  46          12                  (3)          40            41
Net Change in Cash                                    198           (423)           (113)            650            315
Net Cash - Begin Balance/Rsvd for Future Use          810           1,233           1,346            696            381
Net Cash - End Balance/Rsrv for Future Use          1,008            810            1,233           1,346           696
Depreciation, Supplemental                            656            607              562            557            534
Cash Interest Pd, Suppl                               242            214              247            233            245
Cash Taxes Pd, Supplemental                           960            820              600            380            310


Balance Sheet

In Millions of U.S. Dollars                       2007             2006           2005             2004            2003
(except for per share items)                   09/30/07         09/30/06       09/30/05         09/30/04        09/30/03

Cash and Short Term Investments                  1,008              810          1,233            1,346             696
Trade Accounts Receivable, Gross                 4,346            3,790          3,332            3,010           2,732
Provision for Doubtful Accounts                    (86)             (74)           (76)             (78)            (82)
Total Receivables, Net                           4,260            3,716          3,256            2,932           2,650
Inventory - Finished Goods                         884              887            711              693             628
Inventory - Raw Materials                        1,343            1,335          1,102            1,012             930
Total Inventory                                  2,227            2,222          1,813            1,705           1,558
Other Curr. Assets, Total                          570              582            535              433             596
Total Current Assets                             8,065            7,330          6,837            6,416           5,500
Buildings                                        1,683            1,536          1,426            1,402           1,341
Land/Improvements                                  199              188            185              184             178
Machinery/Equipment                              6,138            5,811          5,442            5,284           5,129
Construction in Progress                           414              354            303              249             216
Property/Plant/Equipment - Gross                 8,434            7,889          7,356            7,119           6,864
Accumulated Depreciation                        (5,003)          (4,669)        (4,353)          (4,182)         (3,902)
Property/Plant/Equipment - Net                   3,431            3,220          3,003            2,937           2,962
Goodwill, Net                                    6,412            6,013          5,479            5,259           4,942
Intangibles, Net                                   715              633            467              353             251
Long Term Investments                              203              280            364              347             475
Other Long Term Assets                             205              159            152              166             221
Total Assets                                    19,680           18,672         17,227           16,361          15,194


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Accounts Payable                            2,501     2,305     1,841     1,629           1,397
Accrued Expenses                            2,337     1,933     1,839     1,695           1,513
Notes Payable/Short Term Debt                 404       898       970       902             391
Other Current Liabilities, Total              304       238       281       113             116
Total Current Liabilities                   5,546     5,374     4,931     4,339           3,417
Total Long Term Debt                        3,372     3,128     3,128     3,136           3,733
Total Debt                                  3,776     4,026     4,098     4,038           4,124
Deferred Income Tax                           519       724       567       528             503
Minority Interest                             191       176       142       126             114
Pension Benefits - Underfunded                747       624       661       591             665
Other LT Liabilities                          533       492       398       403             302
Other Liabilities, Total                    1,280     1,116     1,059       994             967
Total Liabilities                          10,908    10,518     9,827     9,123           8,734

Common Stock                                  477       238       238       238             238
Additional Paid-In Capital                     31       161       120        87              65
Retained Earnings (Accumulated Deficit)    12,536    11,314    10,199     9,471           8,889
Treasury Stock - Common                    (4,654)   (3,865)   (3,092)   (2,470)         (2,346)
Other Equity, Total                           382       306       (65)      (88)           (386)
Total Equity                                8,772     8,154     7,400     7,238           6,460
Total Liabilities & Shareholders’ Equity   19,680    18,672    17,227    16,361          15,194
Total Common Shares Outstanding               788       805       821       839             842
Trsy. Shrs-Comm. Primary Iss.                 165       149       132       114             111




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