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Emerson's (EMR) Q4 Earnings & Sales Top, Guidance Upbeat

Emerson Electric Co. EMR reported fourth-quarter fiscal 2017 adjusted earnings of 83 cents per share, which trumped the Zacks Consensus Estimate of 80 cents by 3.8%, and grew 12% 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.

Fiscal 2017 adjusted earnings came in at $2.64, reflecting growth of 8% over fiscal 2016.

Inside the Headlines

The fiscal fourth quarter witnessed the company sustain its growth track, as the Automation Solutions and Commercial & Residential Solutions platforms delivered net and underlying sales growth as well as enjoyed strong order rates in the reported quarter. Net sales grew 13% year over year to $4,435 million and surpassed the Zacks Consensus Estimate of $4,424 million. Underlying sales growth for the quarter was 3% and acquisitions contributed 9% to growth, while currency translation affected the top line favorably by 1%. Consistently improving conditions in the energy related, hybrid and general industrial markets drove sales.

For fiscal 2017, net sales came in at $15.3 billion, up 5% year over year, indicating strengthening global economic conditions, stabilizing oil prices, and improving industrial and emerging market demand.

Coming to the segments’ performance in the fiscal fourth quarter, the company’s Automation Solutions platform reported an impressive 18% year-over-year growth in net sales to $2,894 million. Underlying sales also grew 3% 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 10%, led by energy, life sciences and chemical markets. Asia was up 2%, while China grew 8% on robust demand in the process automation and discrete markets. Europe was up 2%, while Latin America and Middle East/Africa were down 18% and 11% respectively.

Margins contracted 30 basis points (bps) year over year to 16.9%. However, excluding the dilutive impact of the Valves & Controls acquisition, margins actually expanded 300 bps to 20.2%, driven by restructuring benefits, lower restructuring outlay, favorable material costs and leverage on higher sales.

MRO activity levels in energy-related markets are gathering momentum, 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 2018.

The Commercial & Residential Solutions platform witnessed a 4% increase in net sales and 3% growth in underlying sales, with net sales coming in at $1,543 million. The top line was supported by robust demand in the global HVAC and refrigeration markets, and encouraging conditions in the construction related markets. Asia witnessed particularly strong growth once again, as it rose 14% year over year, driven by robust growth in China, which is enjoying major demand acceleration in the refrigeration and air conditioning markets. Europe was up 4%, while North America contracted 1%, as both HVAC and refrigeration markets took a hit due to comparatively cooler weather and the disruption from Texas and Florida hurricanes. Latin America went down 5%, while the Middle East/Africa grew 20%.

Under the platform, the Climate Technologies business grew 4.1% year over year to $1,108 million, while the Tools & Home Products unit grew 2.4% year over year to $435 million.

Margins contracted 110 bps to 23.5% as the declining ClosetMaid business drove 50 bps of margin dilution in the quarter.

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 enhance its automation portfolio, and help it offer 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 year, the company had cash and cash equivalents of $3.06 billion, with long-term debt of $3.8 billion. Net cash provided by operating activities in fiscal 2017 plunged 33.6% from the prior year to $1,912 million.

Outlook

In light of the recent optimistic order trends and recovering end markets, Emerson released optimistic outlook for fiscal 2018. It expects net sales for the year to climb 8-10%,with underlying sales to be up 4-6%.

Further, in light of strong operational performance and positive order trends, Emerson projects adjusted earnings per share for fiscal 2018 to be in the range of $2.75-$2.95.

Emerson projects Automation Solutions net sales to be up 14-16%, while Commercial & Residential Solutions net sales growth is anticipated to range from down 1% or up 1%.

To Conclude

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

Emerson anticipates 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, 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 same space include Atlas Copco AB ATLKY, IDEX Corporation IEX and Altra Industrial Motion Corp. AIMC, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Atlas Copco has a modest earnings surprise history for the trailing four quarters, having beaten estimates twice for an average of 9.9%.

IDEX Corporation also has a decent earnings surprise history, with an average beat of 4.4% over the trailing four quarters, beating estimates each time.

Altra Industrial generated four strong beats during the same time frame, for an average positive surprise of 17.3%.

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