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Why Is Emerson Electric (EMR) Up 9% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Emerson Electric (EMR). Shares have added about 9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Emerson Electric due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Emerson Q2 Earnings Beat Estimates, Revenues Miss

Emerson second-quarter fiscal 2020 (ended Mar 31, 2020) adjusted earnings of 89 cents per share beat the Zacks Consensus Estimate of 76 cents. Notably, the company’s earnings met estimates in the last reported quarter. On a year-over-year basis, the bottom line increased 6% from 84 cents.

Top-Line Details

Emerson’s revenues were $4,162 million in the quarter, reflecting a decline of 9% from the year-ago quarter. Underlying sales were down 7% on account of the decline in demand, particularly in March, owing to the coronavirus outbreak. Forex woes had a 2% adverse impact on sales, while acquired assets had no impact.

Notably, the top line lagged the Zacks Consensus Estimate of $4,389 million.

The company reports net sales under two segments — Automation Solutions, and Commercial & Residential Solutions. Fiscal second-quarter segmental results are briefly discussed below:

Automation Solutions’ revenues were $2,709 million, decreasing 10% year over year. Underlying sales declined 8%, while forex woes adversely impacted sales by 2%. Acquired assets had no impact on sales.

Commercial & Residential Solutions generated revenues of $1,458 million in the fiscal second quarter, down 7% year over year. Underlying sales were down 5%, while divestitures had an adverse impact of 1% on sales. Forex woes adversely impacted sales by 1%. Under the segment, Climate Technologies’ sales declined 6% year over year to $1,026 million, while that from Tools & Home Products decreased 7.9% to $432 million.

Gross Margin

In the quarter under review, Emerson's cost of sales decreased 8.8% year over year to $2,412 million. It represented 58% of net revenues compared with 57.9% in the year-ago quarter. Gross margin was relatively flat at 42.1%. Selling, general and administrative (SG&A) expenses declined 14.1% year over year to $983 million. As a percentage of sales, SG&A expenses were 23.6%, down from 25.1% in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the fiscal second quarter, Emerson had cash and cash equivalents of $2,583 million, up from $1,384 million at the end of the year-ago quarter. Long-term debt balance increased 4.6% year over year to $3,960 million. During the first six months of fiscal 2020, the company repaid debts of $502 million.

In the first six months of fiscal 2020, it generated net cash of $1,012 million from operating activities, reflecting an increase of 18.2% from the year-ago comparable period. Capital expenditure was $225 million, down from $274 million in the year-ago comparable period.

During the first six months of fiscal 2020, the company paid out dividends amounting to $611 million and repurchased shares worth $942 million.

Outlook

For fiscal 2020 (ending September 2020), it anticipates net sales decline of 9-11%. Underlying sales are expected to fall 7-9%.

Adjusted earnings per share are predicted to be $3.00-$3.20 for fiscal 2020.

Emerson estimates Automation Solutions’ net sales to decline 8-10%, while Commercial & Residential Solutions’ net sales are projected to decline 11-13%.

Notably, the company anticipates substantial demand decline in the fiscal third quarter and persistent weak demand in the quarters ahead.
 

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -20.59% due to these changes.

VGM Scores

Currently, Emerson Electric has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Emerson Electric has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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