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Emerson (EMR) Beats Q1 Earnings; Sales Still Weak, View Up

Emerson Electric Co.EMR reported first-quarter fiscal 2017 adjusted earnings of 49 cents per share, beating the Zacks Consensus Estimate of 43 cents by 14%.

Emerson's earnings from continuing operations reflected growth of 22% year over year. An improving macro environment, restructuring benefits and lower expenses boosted the bottom line.

Inside the Headlines

Net sales continued to display weakness, as they decreased 4% year over year to $3,337 million. Underlying sales growth for the quarter was down 3% and currency translation also impacted the top line adversely. Sustained challenging macroeconomic conditions and significant decline in spending by global customers in the oil & gas and industrial markets were the primary causes of the dismal top-line performance.

The company's Automation Solutions platform reported a 9% year-over-year decline in net sales to $1,967 million. Underlying sales dipped 8% as restrained spending in energy-related and general industrial markets hurt operations. Underlying sales in North America declined 11%, while Asia was down 2%. Europe slid 5% and Latin America was down 29%, while Middle East/Africa was up 3%.

Despite soft spending by the oil and gas clients, MRO activity levels seem encouraging and are expected to be beneficial for at least the next two quarters. Further, margins expanded 80 basis points to 16.6%, driven by savings from the prior-year restructuring actions.

In contrast, the Commercial & Residential Solutions platform saw a 6.3% increase in net sales to $1,252 million, supported by robust demand in global HVAC and refrigeration markets, and encouraging conditions in professional tools. Asia witnessed particularly strong growth as it rose 26% year over year, driven by a 40% growth in China, which is enjoying major demand acceleration. Europe was up 7% led by solid growth in air conditioning and professional construction tools, while North America grew 4%, driven by growth in the U.S. residential and commercial air conditioning.

Under the platform, the Climate Technologies business grew 9% year over year to $859 million, while Tools & Home Products unit remained almost flat year over year at $393 million.

Margins expanded 140 basis points to 19.9%, largely due to savings from restructuring actions across the new platform structure and leverage on higher volume.

Emerson Electric Company Price, Consensus and EPS Surprise

Emerson Electric Company Price, Consensus and EPS Surprise | Emerson Electric Company Quote

Other Developments

In third-quarter fiscal 2016, Emerson had announced agreements to sell its Network Power, Leroy-Somer and Control Techniques businesses for an aggregate value of $5.2 billion. 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.

The company has also inked an agreement to purchase Pentair Valves & Controls, a business unit of Pentair plc, for $3.15 billion, in order to drive efficiency and growth.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 its brand value.

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

Emerson is now reporting the entire Network Power segment as discontinued operations.

Liquidity & Cash Flow

Exiting the quarter, the company had cash and cash equivalents of $4.2 billion, with long-term debt of $3.8 billion. Net cash provided by operating activities in the quarter plunged 51% from the prior-year quarter to $238 million.

Outlook

In light of the recent order trend, which has been favorable, Emerson raised its outlook for fiscal 2017. It now expects net sales for the year to be down 1-3%, with underlying sales flat to down 2%. This is comparable to prior projections of net and underlying sales to decline 1-3%. Further, Emerson projects reported earnings per share for fiscal 2017 to be in the range of $2.47-$2.62 (earlier guidance: $2.35-$2.50).

Emerson expects Automation Solutions net sales to be down 5-7%, while Commercial & Residential Solutions net sales are now expected to be up 3-5%.

To Conclude

Emerson's persistent problems continue to hurt its top line. However, the company now foresees the challenging global market environment to recover gradually. Moreover, solid order trends in both data center and telecommunications infrastructure markets will likely support sales in the coming quarters. Emerson's cost-cutting and restructuring initiatives are also likely to benefit the company's profitability, going forward.

A strong U.S. dollar, low industrial spending and weakness in emerging and mature economies remain major concerns. Further, Emerson foresees a decrease in profitability in the near term owing to the volume deleverage stemming from weakness in underlying sales and impact of restructuring initiatives.

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

Stocks to Consider

Some better-ranked stocks in the broader sector includeABB Ltd. ABB , II-VI Incorporated IIVI and Applied Industrial Technologies Inc. AIT .

ABB Ltd., has generated a positive average earnings surprise of 23.5% in the trailing four quarters, beating estimates all through and currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

II-VI Incorporated, also sporting a Zacks Rank #1, has registered a remarkable positive average surprise of over 59.2% for the four trailing quarters, driven by four remarkable consecutive beats.

Applied Industrial Technologies carries a Zacks Rank #2 (Buy) and has managed to beat estimates thrice in the trailing four quarters, for a positive earnings surprise of 6.2%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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