Emerson (EMR) Q4 Earnings: What's In Store For The Stock?

Emerson Electric Co. (NYSE:EMR) is slated to report fourth-quarter fiscal 2016 results before the opening bell on Nov 1.

Last quarter, the company had posted a positive earnings surprise of 4.8%. Also, Emerson has beaten earnings estimates twice in the trailing four quarters for as many misses, resulting in an average positive surprise of 1.4%.

Let's see how things are shaping up for this announcement.

Factors to Consider

We believe that volatility in the oil and gas market, which has impacted Emerson’s business throughout fiscal 2015 and in fiscal 2016 so far, will likely prove to be a drag on fiscal fourth quarter’s profits. Meanwhile, an oversupplied market has been hampering prices and spending levels of customers, thereby marring Emerson’s prospects.

Further, activity in the upstream oil and gas space is affecting the company’s orders. In September, Emerson revealed its orders for the trailing three months, which depicted a gloomy picture for the company. Order rates continued to plunge in all its key segments, excluding Network, Power and Climate Technologies.

In addition, constrained capital spending in North America and sluggishness in China continue to be an overhang. Also, Emerson believes that global economic conditions may take a turn for the worse on account of political uncertainty which will keep spending levels considerably low for the rest of fiscal 2016. Due to such tough economic conditions and dwindling order numbers, the company forecasts underlying sales to be down 5–6% in fiscal 2016.

We perceive that adverse market conditions and currency headwinds will prove to be major dampeners for the upcoming quarterly results.

Despite these negatives, a competent management team, along with high-profile franchisees, remains major positives for Emerson. Of late, an uptick in manufacturing demand in the U.S. and enhanced housing activity are proving conducive to growth. Further, crude oil has witnessed an uptick in recent times and this should bode well for Emerson’s results.

Also, over the past few quarters, Emerson has been methodically divesting underperforming assets to invest in core business and achieve a leaner and more flexible organizational structure. It has prioritized cost-structure alignment and strategic portfolio repositioning, and we believe that the cost savings will also boost the company’s bottom line.

As part of the portfolio repositioning efforts, Emerson recently inked an agreement to purchase Pentair Valves & Controls, a business unit of Pentair plc (NYSE:PNR) , in a bid to strengthen its automation portfolio. This $3.15-billion buyout came close on the heels of the company’s announcement that it will divest its Network Power, Leroy-Somer and Control Techniques businesses. The sale of these three will generate $5.2 billion in proceeds. Such strategic initiatives will bolster the company’s core operations and improve efficiency, thus driving future growth.

Emerson has also won numerous contracts in the quarter under review. It has secured an automation maintenance and reliability services contract for Shell’s Prelude Floating Liquefied Natural Gas facility. Emerson has been acting as Main Automation Contractor on the Prelude project for half a decade.

Per the new multi-year support contract, Emerson professionals will work onshore and offshore and offer reliability and maintenance services for a wide range of equipment. Emerson was also chosen by French oil firm – Total Exploration and Production Services – for its control and safety system maintenance services. In addition, Nexen Petroleum U.K. selected Emerson for a five-year contract to provide metering management services. Such wins will definitely improve the company’s operations.

Earnings Whispers

Our proven model does not conclusively show that Emerson will beat earnings estimates in this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) for this to happen. But that is not the case here as you will see below.

Zacks ESP: Earnings ESP for the company is currently pegged at 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 89 cents.

Zacks Rank: Emerson’s Zacks Rank #3 increases the predictive power of ESP. However, we need to have a positive ESP as well to be confident about an earnings beat.

Note that we caution against stocks with Zacks Rank #4 or #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Ashford Hospitality Prime, Inc. (NYSE:AHP) , scheduled to release results on Nov 2, has an Earnings ESP of +9.76% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Shire plc (NASDAQ:SHPG) , slated to release earnings results on Nov 1, has an Earnings ESP of +1.25% and a Zacks Rank #2.

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