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Emerson (EMR) Q3 Earnings in Line, Guidance Raised Again

Emerson Electric Co. EMR reported third-quarter fiscal 2017 adjusted earnings of 68 cents per share, in line with the Zacks Consensus Estimate. The figure was flat year over year.

Favorable global market conditions and strong top-line growth boosted the bottom line, which was offset by high cost of sales and administrative expenses.

Inside the Headlines

The fiscal third quarter saw the company return to growth, as both the Automation Solutions and Commercial & Residential Solutions platforms delivered net and underlying sales growth and boasted high-single digit order rates in the quarter. Net sales grew 9.9% year over year to $4,039 million. Revenues surpassed the Zacks Consensus Estimate of $3,975 million. Underlying sales growth for the quarter was 4% and acquisitions contributed 7% to growth, while currency translation affected the top line adversely by 1%. Consistent improvement in key end markets and growth in the U.S., and Asia drove sales.

The company’s Automation Solutions platform reported an impressive 12% year-over-year growth in net sales to $2,440 million. Underlying sales also grew 2%, as favorable trends in key served markets supported operations. Robust, broad-based demand in power, life sciences and chemical markets was driven by higher optimization projects and MRO activity. Underlying sales in North America rose 6%, led by energy-related markets, while Asia was also up 6%. Europe was down 5%, while Latin America and Middle East/Africa were also down 17% and 2% respectively.

Margins contracted 70 basis points to 15.5%. However, excluding the dilutive impact of the Valves & Controls acquisition, margins actually expanded 170 basis points to 17.9%.

MRO activity levels in energy-related markets are gathering momentum, particularly in North America, driven by shale and downstream customers. Power and life sciences markets also remained favorable. Continued improvement in order trends and an expanding project line indicate favorable momentum for the segment in the fiscal fourth quarter.

The Commercial & Residential Solutions platform witnessed a 7% increase in net and underlying sales, with net sales coming in at $1,602 million, supported by robust demand in global HVAC and refrigeration markets, and encouraging conditions in construction related markets. Asia witnessed particularly strong growth once again, as it rose 17% year over year, driven by robust growth in China, which is enjoying major demand acceleration in refrigeration, heating and air conditioning markets. Europe was up 1%, while North America grew 6%, led by consistent strength in the air conditioning & refrigeration markets, and strong demand for professional tools in the oil and gas, and construction-related markets.Latin America went up 7%, while Middle East/Africa was down 6%.

Under the platform, the Climate Technologies business grew 7.8% year over year to $1,187 million, while Tools & Home Products unit grew 3.8% year over year at $415 million.

Margins contracted 50 basis points to 25.1%.

Emerson Electric Company Price, Consensus and EPS Surprise

Other Developments

During the fiscal second quarter, the company had completed the acquisition of Pentair Valves & Controls, a business unit of Pentair plc, for $3.15 billion.Integrating Pentair’s Valves & Controls business will enable Emerson to fortify its automation portfolio, and help it in offering complete valve solutions portfolio and sturdy service network, thereby elevating the company’s brand value.The company is now aggressively working on integrating the Valves & Controls business.  It expects the acquisition to be earnings accretive in fiscal 2018 and contribute meaningfully to operating cash flow.

Emerson also expanded its global capabilities in fresh food monitoring, on the back of the Locus Traxx and PakSense buyouts. These two companies will assist Emerson in facilitating steady and safe control of food, and other temperature-sensitive goods.

As part of its restructuring, Emerson had announced agreements to sell its Network Power, Leroy-Somer and Control Techniques businesses in fiscal 2016. The deals are part of the company’s portfolio-repositioning strategy, as it seeks to enhance focus on its core Automation Solutions and Commercial & Residential Solutions businesses. The restructuring will help Emerson leverage on its growth platforms and drive profitable growth.

Liquidity & Cash Flow

Exiting the quarter, the company had cash and cash equivalents of $3.14 billion, with long-term debt of $3.8 billion. Net cash provided by operating activities in the quarter rose 23% from the prior-year quarter to $774 million.

Outlook

In light of the recent optimistic order trends and recovering end markets, Emerson raised its outlook for fiscal 2017 for the third consecutive time. It now expects net sales for the year to grow about 5%,with underlying sales to be up about 1%. This is comparable to the prior projections of net sales to be approximately flat,with underlying sales to be up about 1% (excluding unfavorable currency translation of approximately 1%).

Further, in light of strong operational performance and positive order trends, Emerson now projects earnings per share for fiscal 2017 to be in the range of $2.58–$2.62 (earlier guidance: $2.50–$2.60).

Emerson now expects Automation Solutions net sales to be up 4–5% (earlier projection: down 3–4%), while Commercial & Residential Solutions net sales are anticipated to be up 5–6% (in line with earlier projections).

To Conclude

In the fiscal third quarter, the company returned to broad-based growth, driven by favorable trends in energy-related, hybrid and general industrial markets, as well as strong demand in HVAC and refrigeration markets. Favorable construction markets in North America, Asia and Europe also boosted revenues.

Emerson expects increasingly favorable global market conditions and positive trends in capital spending, which will likely drive underlying sales growth across both platforms in the coming quarters. Solid order trends, successful multi-year restructuring initiatives, and momentum in both its platforms should prove accretive for the company’s sales. Emerson’s cost-cutting initiatives are also likely to boost the company’s profitability significantly, going forward.

However, a strong U.S. dollar, volatile industrial spending, and uncertainties in emerging and mature economies remain concerns.

Emerson currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks in the broader space include Barnes Group Inc. B, Eaton Corporation, PLC ETN and Regal Beloit Corporation RBC. While Barnes Group sports a Zacks rank #1 (Strong Buy), Eaton and Regal Beloit both carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Barnes Group has a solid earnings surprise history for the trailing four quarters, having beaten estimates each time for an average of 11.6%.

Eaton also has a decent earnings surprise history, with an average beat of 3.3% over the trailing four quarters, beating estimates thrice.

Regal Beloit generated two beats over the trailing four quarters, for an average positive surprise of 1.5%.

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Emerson Electric Company (EMR): Free Stock Analysis Report
 
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