Emerson's (EMR) Q4 Earnings Beat Estimates, View Bleak

Emerson Electric Co. (NYSE:EMR) reported fourth-quarter fiscal 2016 adjusted earnings of 96 cents per share, beating the Zacks Consensus Estimate of 89 cents by 7.9%, and reflecting a 3% increase from the year-ago tally.

For fiscal 2016, Emerson’s adjusted earnings slid down 6% year over year to $2.98 per share. Weakness in top line, high restructuring expenses and challenging demand conditions in key markets constrained profits.

Inside the Headlines

Net sales continued to show significant weakness, as they decreased 6% year over year to $5.5 billion. Underlying sales growth for the quarter was negative globally, except the U.S. and China, which were flat. In aggregate, underlying sales were down 5%. 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.

For fiscal 2016, Emerson’s sales were down 9% to $20.2 billion, as the company grappled with persistent difficult conditions in key served markets.

Segment-wise, Process Management’s net sales fell about 11% in the quarter to $2,046million, with underlying sales also slipping 11%, which was attributable to low order rates stemming from weak global spending in the oil and gas industry. The segment recorded weakness across North America, Asia, Middle East and Latin America, with a flat Europe.

Industrial Automation reported a 7% decline in year-over-year net sales to $543 million, with an underlying sales decrease of 11% due to persistent softness in industrial spending and upstream oil and gas markets. Geographically, this segment also witnessed an all-round weakness.

Network Power’s net sales fell 2% year over year, with underlying sales declining by a similar percentage. Strong performance in both data center and telecommunications infrastructure spending drove growth and North America charted robust growth. However, this was more than offset by declines in other businesses.

Last quarter, Emerson had announced that the Network Power is being sold to Platinum Equity for $4 billion, as a part of its portfolio streamlining initiatives. Post this transaction, Emerson will retain a subordinated interest in Network Power. Emerson is now reporting the entire Network Power segment as discontinued operations, pending its divestiture.

Climate Technologies stood out as the only one with positive year-over-year sales growth as its net sales were up 6% year over year to $1,1065 million, with a 6% increase in underlying sales. The segment benefited from robust demand in the U.S. air conditioning and commercial refrigeration market (particularly in China).

Commercial & Residential Solutions’ net sales fell 15% year over year to $425 million, driven largely by the divestiture of the commercial storage business. Good performance in food waste disposers and wet/dry vacuums business were more than offset by declines in the professional tools and residential storage business.

Underlying sales were relatively flat year over year, after taking into account the previous-year divestiture of the commercial storage business. Improving trends in the U.S. construction market bode well for the segment’s outlook in the coming quarters.

EMERSON ELEC CO Price and EPS Surprise

Other Developments

Last quarter, Emerson 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 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 allow 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.

Liquidity & Cash Flow

Exiting the quarter, the company had cash and cash equivalents of $3.2 billion with long-term debt of $4.1 billion. Net cash provided by operating activities in the quarter surged 34.7% from the prior-year quarter to $2,499 million, driven by superior working capital management.

Outlook

Emerson expects the unfavorable operating environment to continue, with oil and gas markets showing significantly depressed spending levels. In particular, the company anticipates the automation business to suffer, as difficult economic conditions and political uncertainty hurt both operational and capital spending across multiple end markets.

Thus, the company estimates net and underlying sales for fiscal 2017 to decline 1–3% (down from previous projections of 5–8%). Further, Emerson projects reported earnings per share for fiscal 2017 to be in the range of $2.35–$2.50 (compared with fiscal 2016 earnings of $2.45 per share).

To Conclude

Emerson’s persistent problems continue to hurt its operations. The company expects the global market environment to remain challenging, with a strong U.S. dollar, low industrial spending and weakness in emerging and mature economies among the 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.

However, Emerson’s cost cutting and restructuring initiatives are likely to benefit the company, going forward. Moreover, strong order trends in both data center and telecommunications infrastructure markets will likely support sales in the coming quarters.

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

Stocks to Consider

Some better-ranked stocks in the broader sector include AO Smith Corp. (NYSE:AOS) , II-VI Inc. (NASDAQ:IIVI) and Applied Industrial Technologies Inc. (NYSE:AIT) .

AO Smith has a robust earnings beat history, with an average positive earnings surprise of 5.4% over the trailing four quarters, beating estimates all through. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Applied Industrial Technologies carries a Zacks Rank #2 (Buy) and has managed to beat estimates thrice over the trailing four quarters and has a positive earnings surprise of 4.9%.

II-VI Incorporated, sporting a Zacks Rank #1, has registered a remarkable positive average surprise of over 39.8% over the four trailing quarters, driven by four strong consecutive beats.

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