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Emerson (EMR) Q2 Earnings in Line, Guidance Raised Again

Emerson Electric Co.EMR reported second-quarter fiscal 2017 adjusted earnings of 58 cents per share, in line with the Zacks Consensus Estimate. Notably, the figure reflected growth of 2% year over year.

An improving macro environment, restructuring benefits and lower expenses boosted the bottom line.

Inside the Headlines

Net sales remained flat year over year at $3,574 million, on both a net and underlying basis. Revenues surpassed the Zacks Consensus Estimate of $3,489 million. Underlying sales growth for the quarter was down 3% and currency translation also affected the top line adversely. Consistent improvement in key end markets and growth in the U.S., Europe and Asia drove sales. However, challenging macroeconomic conditions and significant decline in spending by global customers in the oil & gas and industrial markets hurt the top-line performance, resulting in flat growth.

The company's Automation Solutions platform reported a 3% year-over-year decline in net sales to $2,117 million. Underlying sales also dipped 3% as restrained spending in energy-related and general industrial markets hurt operations. Underlying sales in North America declined 2%, while Asia was also down 2%. Europe was flat, while Latin America and Middle East/Africa were down 16% and 9% respectively.

Despite soft spending by the oil and gas clients, 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.

Margins contracted 10 basis points to 15.5%, primarily due to deleverage on lower volume. In light of current and expected order trends, the company anticipates the second half of the fiscal year to gain momentum, driven by MRO and small project activity.

In contrast, the Commercial & Residential Solutions platform witnessed a 5% increase in net sales to $1,460 million, supported by robust demand in global HVAC and refrigeration markets, and encouraging conditions in construction related markets. Asia witnessed particularly strong growth as it rose 13% year over year, driven by 20% growth in China, which is enjoying major demand acceleration. Europe was up 6% led by solid growth in air conditioning and professional construction tools, while North America grew 4%, stemmed by growth in the U.S. residential and commercial air conditioning.Latin America went up 7%, while Middle East/Africa was down 3%.

Under the platform, the Climate Technologies business grew 6.5% year over year to $1,058 million, while Tools & Home Products unit grew 2% year over year at $402 million.

Margins expanded 80 basis points to 23.7%, 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

During the reported quarter, the company completed the acquisition of 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 the company's brand value.

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

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.

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 $5 billion, with long-term debt of $3.8 billion. Net cash provided by operating activities in the quarter plunged 66% from the prior-year quarter to $410 million.

Outlook

In light of the recent optimistic order trends and recovering end markets, Emerson raised its outlook for fiscal 2017 for the second time. It now expects net sales for the year to be approximately flat,with underlying sales to be up about 1% (excluding unfavorable currency translation of approximately 1%). This is comparable to the prior projections of net sales for the year to be down 1-3%, with underlying sales flat to down 2%. Further, Emerson projects earnings per share for fiscal 2017 to be in the range of $2.55-$2.65 (earlier guidance: $2.47-$2.62).

Emerson now expects Automation Solutions net sales to be down 3-4% (earlier projection: down 5-7%), while Commercial & Residential Solutions net sales are now anticipated to be up 5-6% (earlier projection: up 3-5%).

To Conclude

Emerson expects the challenging global market environment to recover gradually, as it sees improving economic conditions and positive trends in capital spending. Solid order trends, successful multi-year restructuring initiatives, and momentum in both its platforms should drive results for the company in the coming quarters. Emerson's cost-cutting and restructuring initiatives are likely to boost the company's profitability significantly, going forward.

However, a strong U.S. dollar, low industrial spending, and weakness in emerging and mature economies remain major concerns.

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

Stocks to Consider

Some better-ranked stocks in the broader sector include Applied Industrial Technologies Inc. AIT , Donaldson Company, Inc. DCI and The Middleby Corp. MIDD . While Applied Industrial sports a Zacks Rank #1 (Strong Buy), Donaldson and Middleby carry a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here.

Applied Industrial Technologies managed to beat estimates thrice in the trailing four quarters, for a positive earnings surprise of 9.8%.

With three beats over the trailing four quarters, Donaldson has a positive average earnings surprise of 5.9%.

Middleby Corporation surpassed earnings estimates in each of the trailing four quarters, resulting in an average surprise of 14.1%.

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Emerson Electric Company (EMR): Free Stock Analysis Report

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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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