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Emerson Electric (EMR) Up 2.6% Since Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Emerson Electric Co. (EMR - Free Report) . Shares have added about 2.6% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is EMR due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Emerson Beats on Q2 Earnings & Sales, Ups FY18 View

Emerson reported second-quarter fiscal 2018 adjusted earnings of 76 cents per share, beating the Zacks Consensus Estimate of 71 cents by 7%.

Favorable global market conditions and strong top-line growth boosted the company’s bottom line, which was offset by high cost of sales and administrative expenses.

Inside the Headlines

The company continued with its growth momentum in the fiscal second quarter as both the Automation Solutions and Commercial & Residential Solutions platforms delivered a rise in net sales. The metric grew 18.9% year over year to $4,248 million and surpassed the Zacks Consensus Estimate of $4,200 million.

While underlying sales growth for the quarter was 8%, acquisitions and divestitures contributed 8% to growth, and currency translation favorably impacted the top line by 3%. Persistent improving conditions in the energy related, chemical, life sciences and discrete markets drove sales.

In the fiscal second quarter, the company’s Automation Solutions platform reported an impressive 30.9% year-over-year growth in net sales to $2,771 million. Underlying sales was up 10% 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 recorded an increase of 16%, courtesy of energy related, chemical as well as life sciences markets. The metric was up 7% in Asia, while the same in China grew 20% on continued solid demand across process, hybrid as well as discrete markets. Also, underlying sales in Middle East/Africa were up an impressive 29%. However, the same in Europe and Latin America were down 1% and 10%, respectively.

Margins expanded 20 basis points (bps) year over year to 15.7%. Excluding the dilutive impact of the Valves & Controls acquisition, the same expanded 240 bps to 17.9% driven by leverage on higher sales and restructuring benefits.

Net Sales in the Commercial & Residential Solutions increased 1.6% to $1,483 million. Underlying sales for the segment recorded an increase of 4%. The same metric in North America rose 1% on account of solid demand for professional tools, which was partially offset by lower-than-expected demand for air conditioning.

Asia witnessed strong growth once again as the underlying sales rose 17% year over year backed by solid demand for refrigeration and air conditioning in China. Underlying sales in Europe was up 5%, courtesy of strong demand in air conditioning and construction related markets.

Under the platform, the Climate Technologies business grew 6.6% year over year to $1,128 million, while the Tools & Home Products unit declined 11.7% from the year-ago quarter to $355 million.

Margins contracted 10 bps to 23.6% compared with the prior-year quarter.

Other Developments

During the reported quarter, the company signed an agreement to acquire the Tools and Test Equipment business of Textron for approximately $810 million. Tools & Test, when combined with Emerson’s Ridge Tool Company, will enable Emerson to extend its markets and add major capabilities to meet needs of its customers.

Moreover, the company completed the acquisition of ProSys, a global supplier of software and services that facilitates increased production and safety for chemical, pulp & paper, oil & gas as well as refining industries. ProSys’ unique technologies and proficiency are expected to enable Emerson to aid customers in improving plant performance, safety and profitability by optimizing human as well as automation resources.

Also, the company completed the buyout of Cooper-Atkins, a leading technology company in foodservice markets. This buyout is anticipated to improve 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.

Liquidity & Cash Flow

Exiting the second quarter, the company had cash and cash equivalents of $2.4 billion and long-term debt of about $3.4 billion.

Guidance

In light of the strong global demand trends, Emerson raised its outlook for fiscal 2018. It now expects net sales for the year to grow about 13%, with underlying sales to be up about 7%. These figures compare favorably with the prior projections of an increase of 11-13% and underlying sales increase of 5-7%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been three revisions higher for the current quarter.

Emerson Electric Co. Price and Consensus

VGM Scores

At this time, EMR has a nice Growth Score of B, however its Momentum is doing a bit better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

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

Based on our scores, the stock is more suitable for momentum investors than those looking for value and growth.

Outlook

Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. Notably, EMR has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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