Emerson Electric Co. (EMR - Free Report) reported first-quarter fiscal 2018 adjusted earnings of 58 cents per share, beating the Zacks Consensus Estimate of 54 cents by 7.4%.
Emerson’s earnings from continuing operations reflected growth of 18.4% year over year. Favorable global market conditions as well as restructuring benefits boosted the bottom line.
Inside the Headlines
The fiscal first quarter witnessed the company sustain its growth track, as the Automation Solutions platform delivered net sales growth in the reported quarter. Net sales grew 18.7% year over year to $3,816 million and surpassed the Zacks Consensus Estimate of $3,716 million.
Underlying sales growth for the quarter was 7%, while acquisitions and divestitures contributed 9% to growth and currency translation affected the top line favorably by 3%. Continuously improving conditions in the energy related, hybrid and general industrial markets drove sales.
Coming to the segments’ performance in the fiscal first quarter, the company’s Automation Solutions platform reported an impressive 30.8% year-over-year growth in net sales to $2,572 million. Underlying sales was up 9% driven by strong MRO demand, as well as small and mid-sized projects focused on expansion and optimization of existing facilities.
Underlying sales in North America rose 14%, led by energy, life sciences and chemical markets as well as investment in Western Canada. Asia was up 13%, while China grew 22% on robust demand in the process and discrete markets. Latin America grew 6%, while Europe and Middle East/Africa were down 1% and 7% respectively.
Margins contracted 160 basis points (bps) year over year to 15%. However, excluding the dilutive impact of the Valves & Controls acquisition, margins actually expanded 120 bps to 17.8%, driven by leverage on higher sales and restructuring benefits.
Net Sales in the Commercial & Residential Solutions were flat, whereas the segment experienced 5% growth in underlying sales, with net sales coming in at $1,252 million. Underlying sales in North America grew 1%, driven by strong demand for professional tools in oil and gas, and construction-related markets.
Asia witnessed particularly strong growth once again, as it rose 17% year over year, driven by robust growth in China, which is experiencing a surge in demand in the refrigeration and air conditioning markets. Both Europe and Latin America were up 1%, while Middle East/Africa grew 4%.
Under the platform, the Climate Technologies business grew 7.3% year over year to $922 million, while the Tools & Home Products unit declined 16% from the year-ago quarter to $330 million.
Margins expanded 20 bps to 20.1% compared with the prior-year quarter.
During the reported quarter, the company completed the acquisition of Paradigm, a dominant provider of software solutions to the oil and gas industry, for $510 million. Paradigm, when combined with Emerson’s Roxar software business, will enable Emerson to offer a best-in-class, end-to-end Exploration & Production (E&P) software portfolio offering.
Moreover, the company decided to acquire a leading technology company in foodservice markets, Cooper-Atkins. The buyout will serve to deepen Emerson’s ability to cater to the needs of its cold chain customers, offering safe control of food as well as other temperature-sensitive products. The transaction is anticipated to close within the next couple of months after fulfilling regulatory conditions.
Liquidity & Cash Flow
Exiting the quarter, the company had cash and cash equivalents of $3.1 billion, with long-term debt of $3.4 billion. Net cash provided by operating activities in the quarter increased 87.8% from the prior-year quarter to $447 million.
Concurrent with the earnings release, Emerson issued outlook for fiscal 2018. It now expects net sales for the year to be up 11–13%, with underlying sales likely to increase 5–7%. This is comparable with prior projections of an increase of 8–10% in net sales, with underlying sales likely to grow 4–6%. Further, Emerson projects GAAP earnings per share for fiscal 2018 to be in the range of $3.05–$3.15 (earlier guidance: $2.66–$2.86).
Emerson expects Automation Solutions net sales to be up 18–20%, while Commercial & Residential Solutions net sales are now expected to increase 1–3%.
Emerson is well positioned to benefit from global infrastructure growth, as its core businesses hold dominant positions in markets tied to energy efficiency and infrastructure spending. Going forward, Emerson believes that telecommunications infrastructure demand will continue to be one of the strongest growth drivers.
The company’s Automation Solutions segment has been experiencing favorable trends in power and life sciences along with improving MRO spending by oil and gas customers, which is expected to boost growth. For Commercial & Residential business, the company’s focus on domains like human comfort, connected home, food quality, and advancing energy efficiency at home and work, is likely to prove conductive for its operations.
Emerson carries a Zacks Rank #3 (Hold).
Stocks to Consider
A few better-ranked stocks in the same space include Applied Industrial Technologies, Inc. (AIT - Free Report) , Cintas Corp. (CTAS - Free Report) and Deere & Company (DE - Free Report) . While Applied Industrial Technologies sports a Zacks Rank #1 (Strong Buy), Cintas and Deere & Company carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Applied Industrial Technologies has an excellent earnings surprise history, surpassing estimates in the trailing four quarters with an average beat of 11.0%.
Cintas also has an excellent earnings surprise history, exceeding estimates in the trailing four quarters with an average beat of 8.2%.
Deere & Company has surpassed earnings estimates in the trailing four quarters. It boasts an average beat of 19.5%.
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