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Will Emerson's Restructuring Help it Brave Macro Headwinds?

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We have recently issued an updated research report on Emerson Electric Co. (EMR - Free Report) . This Zacks Rank #3 (Hold) company is enjoying solid order trends and strong momentum in both its operating platforms, and its multi-year restructuring initiatives are showing results as well.

The company is transforming itself into a leaner and more focused organization. As part of the restructuring, Emerson has offloaded three of its businesses – Network Power, Leroy-Somer and Control Techniques – thus generating $5.2 billion in proceeds. The company also shared its plans to divest the ClosetMaid business by 2017. These restructuring actions will better equip the company to cross-leverage its remaining portfolio and navigate between businesses in an effortless manner.

Currently, Emerson is enthusiastic about the prospects of its Commercial & Residential Solutions segment, which has been witnessing improving trends in the U.S. and Asian construction markets. Thriving Heating Ventilation and Air-Conditioning (“HVAC”), refrigeration markets and construction-related demand in key end markets is also expected to boost the growth of this segment. The Automation Solutions segment is anticipated to gain from favorable trends in power and life sciences, and improving MRO spending by oil and gas customers is likely to boost growth.

In April, the company completed its purchase of Pentair Valves & Controls, a business unit of Pentair plc, for $3.15 billion. Integrating Pentair’s Valves & Controls business will allow Emerson to strengthen its foothold in control, isolation, pressure relief valves and actuation business lines. Further, the company agreed to buy leading non-intrusive corrosion monitoring technologies provider, Permasense Limited. The Permasense buyout will fortify Emerson’s footprint in the integrity and corrosion management solutions business. We believe that these acquisitions will drive growth and expansion for the company in the times to come.

The company has been witnessing some bullish analyst activity on the earnings estimate revision front lately as well, with estimates moving north. Over the past couple of months, the company witnessed eight upward estimate revisions versus none downward. Consequently, the Zacks Consensus Estimate for 2017 moved up from $2.56 to $2.59.

Emerson Electric Company Price and Consensus

However, macroeconomic factors like sluggish economic activity and adverse conditions in the end markets are impeding growth for the company. A strong U.S. dollar, low industrial spending, and weakness in emerging and mature economies have had a direct impact on its operations. The company projects Automation Solutions platform sales in 2017 to be down 3–4%, with currency translation affecting sales adversely to a significant extent.

Further, prolonged softness in the oil and gas markets has affected both capital spending and operational expenditure of clients, thereby hurting Emerson’s prospects.

In light of these restricting factors, Emerson’s shares have recorded a return of just 10.4% over the past one year, much lower than the Zacks-categorized Machinery – Electrical industry average of 18.8%.

However, Emerson’s restructuring strategies, and improving demand trends should prove to be growth driver for its key financials in the coming times. In fact, the company stands to gain significantly when oil markets recover. Encouragingly, it has been witnessing improving economic conditions and positive trends in capital spending, indicating brighter prospects in the near future.

Stocks to Consider

Some better-ranked stocks in the broader sector that are worth a look now include Applied Industrial Technologies Inc. (AIT - Free Report) , Altra Industrial Motion Corp. (AIMC - Free Report) and Barnes Group, Inc. (B - Free Report) . While Applied Industrial Technologies and Altra Industrial Motion sport a Zacks Rank #1 (Strong Buy), Barnes Group holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Applied Industrial Technologies has managed to beat estimates thrice in the past four quarters, for a positive earnings surprise of 9.8%.

Altra Industrial has a positive earnings surprise history, with an average of 15.9% for the railing four quarters, beating estimates all through.

Barnes Group has a solid earnings surprise history for the trailing four quarters, having beaten estimates thrice, for an average beat of 8.9%.

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