Emerson Electric Raises Guidance

It's been a long time coming, but Emerson Electric Co. (NYSE: EMR) is finally growing again. For the first time since the second quarter of 2015, the company's underlying sales were in positive territory. Moreover, Emerson's results were pretty much in line with expectations, but improving trends encouraged management to raise full-year guidance as a consequence.

Let's look at the details behind a busy third quarter for the company.

Emerson Electric third-quarter earnings: The raw numbers

Starting with the headline numbers from the quarter:

  • Net sales of $4.04 billion represented 10% growth and 4% on an underlying basis. Emerson's reported growth is higher because of the impact of the acquisition of Pentair's valves and controls business.
  • The EBIT margin of 16.3% decreased from the 19.1% reported in last year's third quarter, largely because of dilution from the acquisition.
  • Excluding the acquisition, segment operating margin increased to 20.9% from 20.1% in the same quarter last year.
  • EPS from continuing operations was flat at $0.68.

The earnings were in line with guidance from CEO David Farr on the second-quarter earnings call, although they were also slightly disappointing, as 4% underlying growth was at the bottom of the 4%-5% range he had expected.

Nevertheless, management still raised its guidance. Full-year adjusted EPS guidance in the range of $2.58-$2.62, including $0.05 of dilution from the acquisition, is an improvement over previous guidance range of $2.50-$2.60. Farr spoke to the confidence behind the guidance increase: "As we enter the fourth quarter, we expect to see demand and economic conditions improve."

On a less positive note, full-year underlying sales growth guidance was merely maintained at around 1%. This outlook is somewhat confusing, as automation solutions' full-year underlying sales growth guidance was increased to a decline of 1% to 2% from previous guidance for a decline of 2% to 3%. Meanwhile, full-year underlying sales growth expectations for the other segment, commercial and residential solutions, were maintained at 5% to 6% growth.

Farr described the guidance as merely a "rounding" issue and described the overall environment as "trending the right way" and favorable from a margin perspective. That's good news for earnings growth.

What happened in Emerson Electric's third quarter

The big news is the return to underlying sales growth, just as Farr predicted on the first-quarter earnings call. The relative improvement was felt most in automation solutions, with underlying sales up 2% in the quarter as the segment benefited from improving trends in energy capital spending. Commercial and residential solutions generated 7% underlying sales growth in the quarter, and Emerson's global air conditioning and refrigeration markets remain favorable.

Moreover, the trends in the company's trailing three-month orders show ongoing improvement and suggest Farr's expectation for a "5% to 6% type of growth rate right now going into 2018."

Geographic detail

Regarding the geographic breakout in the quarter, China automation solutions sales were up 13%, and commercial and residential solutions sales were up 32%, while overall underlying sales in the Middle East/Africa region declined 3%. Farr talked of improvement in automation solutions and claimed the market is "turning right now."

We'll have to see what happens to the overall company growth rate in relation to China's GDP growth in the second half of the calendar year. On the other hand, the news on the Middle East can be seen in the light of a region has proved problematic for other industrials, such as with General Electric Company's power operations.

Looking ahead

Emerson Electric's results were solid enough, and the automation solution segment is in recovery mode, so the timing of the acquisition from Pentair looks well placed. Investors will be hoping the growth trajectory continues into Emerson's financial 2018, while the margin expansion opportunity from increased sales and the acquisition integration offers potential for earnings growth in the future.

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Lee Samaha has no position in any stocks mentioned. The Motley Fool owns shares of General Electric. The Motley Fool recommends Emerson Electric. The Motley Fool has a disclosure policy.