It has been about a month since the last earnings report for Emerson Electric (EMR). Shares have lost about 4.5% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Emerson Electric due for a breakout? 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 drivers.
Emerson Meets Q2 Earnings Estimates, Lowers FY19 View
Emerson reported in-line results for the second quarter of fiscal 2019 (ended Mar 31, 2019). This came in after the company recorded earnings beat of 12.12% in the last reported quarter.
Earnings in the quarter under review were 84 cents per share, in line with the Zacks Consensus Estimate. However, on a year-over-year basis, the bottom line increased 10.5% from the year-ago figure of 76 cents on the back of healthy sales growth and 2.8% fall in share count.
Organic Sales and Acquired Assets Drive Revenues
Emerson's revenues were $4,570 million in the quarter under review, reflecting growth of 7.6% from the year-ago quarter. Underlying sales in the quarter expanded 4% on the back of healthy demand in hybrid and process end markets as well as robust growth in global professional tools and air conditioning market in North America. However, weakness in the global discrete manufacturing market and soft recovery in Commercial & Residential Solutions' business in Asia, Middle East and Africa played spoilsport in the quarter.
In addition, acquired assets boosted sales by 6% and forex woes had a 2% adverse impact on sales. However, the top line lagged the Zacks Consensus Estimate of $4,651 million by 1.7%.
Underlying orders in January and February grew 5-10% while recorded 4% growth in March.
The company reports net sales under two segments — Automation Solutions, and Commercial & Residential Solutions. The segmental information is briefly discussed below:
Revenues in the Automation Solutions segment were $3,010 million, increasing 8.6% year over year. Underlying sales in the quarter grew 7% while acquired assets expanded sales by 5%. Forex woes adversely impacted sales by 3%.
The Commercial & Residential Solutions segment generated revenues of $1,561 million in the fiscal second quarter, up 5.3% year over year. Underlying sales in the quarter were flat while acquired assets expanded sales by 7%. Forex woes adversely impacted sales by 2%. Under this segment, Climate Technologies' sales declined 3.2% year over year to $1,092 million while Tools & Home Products' sales increased 32.1% to $469 million.
Gross Margin Falls
In the quarter under review, Emerson's cost of sales increased 8.8% year over year to $2,645 million. It represented 57.9% of net revenues versus 57.2% in the year-ago quarter. Gross margin was down 70 basis points (bps) year over year to 42.1% due to accounting charges, acquired assets and unfavorable mix.
Selling, general and administrative expenses (SG&A) expanded 10.6% to $1,145 million. As a percentage of sales, SG&A expenses were 25.1%, up from 24.4% in the year-ago quarter. Operating margin in the quarter decreased 50 bps to 15.8%.
Balance Sheet and Cash Flow
Exiting the fiscal second quarter, Emerson had cash and cash equivalents of $1,384 million, up 10.9% from $1,248 million at the end of the last reported quarter. Long-term debt balance increased 43.4% sequentially to $3,786 million.
Notably, during the first half of fiscal 2019, the company raised $1,135 million from long-term debts while repaid debts of $406 million.
In the first half of fiscal 2019, it generated net cash of $856 million from operating activities, reflecting decline of 9.3% from the year-ago period. Capital expenditure was $274 million, above $194 million in the first half of fiscal 2018.
During the first half of fiscal 2019, the company paid dividends amounting $607 million and repurchased shares worth $1,000 million.
For fiscal 2019 (ending September 2019), the company anticipates sales to grow 7-8.5% year over year. This projection is a revision from the earlier 7-10% growth. Acquired assets are predicted to add 5% to sales growth and forex woes to adversely impact the top line by 2%.
Underlying sales growth is predicted to be 4-5.5% versus 4-7% mentioned earlier. Of this, Automation Solutions’ underlying sales are predicted to be 5-7% (versus the earlier 5-8%) and Commercial & Residential Solutions’ underlying sales will be roughly 2% (versus the earlier 3-5%).
Earnings per share are predicted to be $3.60-$3.70, revised from $3.60-$3.75 per share stated previously. Tax rate will be roughly 23%. Operating cash flow will likely be $3.2 billion and free cash flow will be $2.5 billion.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -7.24% due to these changes.
At this time, Emerson Electric has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% 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.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Emerson Electric has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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