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Emerson to Gain from Solid End-Market Sales Amid Cost Woes

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On Oct 5, we issued an updated research report on Emerson Electric Co. (EMR - Free Report) . This premium manufacturing electronics behemoth offers a wide range of products and services in the areas of process management, climate technologies, network power, storage solutions, professional tools, appliance solutions, motor technologies and industrial automation.

Let’s dig into the fundamental aspects influencing the performance of the stock.

Inside Story

Emerson’s revenues grew 11.1% in the first nine months of fiscal 2018 (ended September 2018). The company’s robust sales generated from mature and emerging end-markets supported the upside. Emerson perceives that increased turnaround activity, ongoing mid and small-sized maintenance, repair and operations projects, and stronger air conditioning demand will drive its top-line growth trajectory in the quarters ahead.

The company currently estimates aggregate underlying sales growth in fiscal 2018 to be 7.5% over the previous year, with 4.5% in Commercial & Residential Solutions segment, and 9% in Automation Solutions segment. Per our estimates, Emerson’s year-over-year revenue growth will be 10.7% for fiscal 2019.

Emerson has also pulled off a positive average earnings surprise of 5.13% in the past four quarters. The company believes that stronger revenues, benefits from restructuring and cost-reduction efforts, and lower corporate tax rates will continue to boost its bottom line performances in the quarters ahead.

The company’s adjusted earnings view for fiscal 2018 is currently pegged at $3.30-$3.40 per share, higher than the prior view of $3.10-$3.20. Per our estimates, Emerson’s year-over-year earnings growth will be 18.1% for fiscal 2019.

The company also tries to provide higher rewards to its shareholders on the back of lucrative dividend and share-buyback offers. In sync with this, Emerson repurchased around $1 billion worth shares since the beginning of fiscal 2018.

Over the past three months, this Zacks Rank #3 (Hold) stock has rallied 12.8%, outperforming 9.6% growth recorded by the industry.

Nevertheless, reflecting neutral market sentiments, the Zacks Consensus Estimate for Emerson’s earnings in fiscal 2019 (ending September 2019) has remained unchanged over the last seven days.

 

The above graph shows that on a P/E (TTM) basis, Emerson’s stock looks overvalued compared with the industry, with the respective tallies of 25.6x and 20.5x for the past three-month period. Also, the stock is currently trading higher than the median P/E (TTM) multiple for the same time frame.

We notice that material cost inflation is a cause of concern for Emerson, of late. In the fiscal third quarter, unfavorable mix and material inflation hurt margins of the company’s Commercial & Residential Solutions segment by nearly 80 basis points (bps). Emerson perceives inflation environment to persist even in the quarters ahead and plans to have more material containment on account of the same.

In addition to this, Emerson’s operations are spread across the world, majority of which are outside the United States. Therefore, they are more prone to global economic and political risks as well as unfavorable movement in foreign currencies. In fact, the company expects unfavorable movement in foreign currencies to hurt revenues in the fiscal fourth quarter. 

This apart, Emerson manages businesses with manufacturing facilities, a majority of which are located outside the United States, and also sources certain materials from international markets. As a matter of fact, emerging countries represent over one-third of the company’s total sales. Given that, changes in laws and policies, economic conditions and political unrest in the host countries might adversely affect the company, going forward.

Stocks to Consider

Some better-ranked stocks in the same space are listed below:

Eaton Corporation plc (ETN - Free Report) carries a Zacks Rank #2 (Buy). The company pulled off an average positive earnings surprise of 2.87% in the last four quarters. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ideal Power Inc. (IPWR - Free Report) also holds a Zacks Rank of 2. The company delivered an average positive earnings surprise of 18.09% in the trailing four quarters.

SPX FLOW, Inc. (FLOW - Free Report) is another Zacks #2 Ranked company. It came up with an average positive earnings surprise of 8.20% during the same time frame.

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