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Why Is Emerson Electric (EMR) Up 9.3% Since Last Earnings Report?

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A month has gone by since the last earnings report for Emerson Electric (EMR - Free Report) . Shares have added about 9.3% 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 drivers.

Emerson Q3 Earnings & Revenues Beat Estimates, Down Y/Y

Emerson third-quarter fiscal 2020 (ended Jun 30, 2020) adjusted earnings of 80 cents per share beat the Zacks Consensus Estimate of 61 cents. On a year-over-year basis, the bottom line declined 14.9% from 94 cents.

Inside the Headlines

Emerson’s revenues were $3,914 million in the quarter, reflecting a decline of 16% from the year-ago quarter. Underlying sales were down 15% on account of the decline in demand owing to the coronavirus outbreak. Forex woes had a 1% adverse impact on sales, while acquired assets had no impact.

Notably, the top line beat the Zacks Consensus Estimate of $3,853 million.

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

Automation Solutions’ revenues were $2,589 million, decreasing 14.4% year over year. Underlying sales declined 13%, while forex woes adversely impacted sales by 1%. Acquired assets had no impact on sales.

Commercial & Residential Solutions generated revenues of $1,327 million in the fiscal third quarter, down 20.1% year over year. Underlying sales were down 19%, while forex woes adversely impacted sales by 1%. Acquired assets had no impact on sales. Under the segment, Climate Technologies’ sales declined 19.1% year over year to $970 million, while that from Tools & Home Products decreased 22.9% to $357 million.

Gross Margin

In the quarter under review, Emerson's cost of sales decreased 14.4% year over year to $2,296 million. It represented 58.7% of net revenues compared with 57.3% in the year-ago quarter. Gross margin was at 41.3%, down 140 basis points on a year-over-year basis. Selling, general and administrative (SG&A) expenses declined 17.1% year over year to $934 million. As a percentage of sales, SG&A expenses were 23.9% compared with 24% in the year-ago quarter.

Balance Sheet and Cash Flow

Exiting the fiscal third quarter, Emerson had cash and cash equivalents of $2,450 million, up from $1,603 million at the end of the year-ago quarter. Long-term debt balance increased 38.9% sequentially to $5,500 million. During the first nine months of fiscal 2020, the company repaid debts of $502 million.

In the first nine months of fiscal 2020, it generated net cash of $1,854 million from operating activities, reflecting an increase of 2.9% from the year-ago comparable period. Capital expenditure was $329 million, down from $395 million in the year-ago comparable period.

During the first nine months of fiscal 2020, the company paid out dividends amounting to $910 million and repurchased shares worth $942 million.

Outlook

For fiscal 2020 (ending September 2020), it anticipates net sales decline of 9-10%. Underlying sales are expected to fall 7.5-9%.

Adjusted earnings per share are predicted to be $3.20-$3.35 for fiscal 2020.

Emerson expects Automation Solutions’ net sales to decline 8-10%, while Commercial & Residential Solutions’ net sales are projected to decline 9-11%.

Notably, the company anticipates continued challenging but gradually improving demand environment in the fiscal fourth quarter and in the quarters ahead.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month.

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. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. 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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