Emerson Electric
Company (EMR) reported fiscal second quarter 2014 results,
ended Mar 31, 2014. Excluding one-time items, earnings for the
quarter came in at 80 cents per share compared with 77 cents per
share in the year-ago period. Quarterly earnings were below the
Zacks Consensus Estimate of 82 cents.
Despite macroeconomic headwinds,
year-over-year profits benefited from the improvement in the
company’s business driven by the accelerated growth conditions in
the emerging markets.
Revenue
Total revenue was down 2.5% year
over year to $5.8 billion. However, organic sales in the quarter
increased 2% despite a negative 5% impact from the Artesyn
divestiture, which was again partially offset by a favorable 1%
impact from acquisition. Marginal growth in organic sales was due
to unfavorable orders timing, disruptive winter weather and weak
first quarter GDP growth in the U.S. and slower implementation of
large projects in the global process industry.
Geographically, the U.S. grew 3%,
while Asia rose 4%, with China up 9%. Europe was up marginally by
1%, while the Middle East/Africa declined 9%.
Nevertheless, orders increased 9%
reflecting stronger market conditions, particularly towards the end
of the quarter. The order growth in March was driven above 15%,
benefiting from large, multi-year industrial projects, recovering
demand for capital goods and improvement in the U.S., Europe, and
Asia. Revenues fell short of the Zacks Consensus Estimate of $5.9
billion.
Segment
Results
Process Management
segment’s net sales grew by 4.4% while it’s underlying sales
increased by 1%. Global oil and gas, power and chemical markets
continued to drive revenue growth for the segment. Orders increased
12% in the quarter, driving up backlog and providing momentum for
growth into next year. By geography, underlying sales in the U.S.
grew 8%. Europe was up 4%, while Asia declined 1%, due to weakness
and difficult comparisons in India and Australia, which were offset
by continued strength in China.
The Industrial
Automation segment reported a 1.6% increase in revenues
driven by an improved demand for capital goods (up 6%),
particularly in emerging markets. The U.S. and Europe were flat, as
sales across mature markets were flat year over year. However, Asia
grew 6%, with robust growth in China. Modest growth in the fluid
automation motors and drives, electrical distribution, and hermetic
motors businesses offset moderate declines in the mechanical power
transmission and power generating alternators businesses. Order
trends increased significantly in February and March across the
segment, led by double-digit growth in the power generating
alternators business, thereby supporting the expectation for sales
growth improvement in the second half of the year.
Network Power
revenues contracted 21% despite a 1% increase in the underlying
sales. Revenues were lowered by a 21% reduction in sales owing to
Artesyn divestiture and 1% reduction in top line due to unfavorable
currency translation. Organic sales in the U.S. grew 1%, while
Europe decreased 3% and Asia increased 4%. Global
telecommunications infrastructure business experienced solid
growth, led by North America and Europe. The segment reported mixed
demand in data center markets, as growth in Asia and North America
was more than offset by weakness in Europe and Latin America.
However, the company anticipates modest growth in 2014, with an
expected increase in robust orders while multi-year projects
strengthened backlog and provies momentum into next year.
Revenues in the Climate
Technologies division increased 5.4% year over year driven
by strength in global refrigeration markets and transportation.
Underlying sales grew about 6%, as currency translation impacted
the top line by less than 1%, with the U.S. up 2%, Asia up 11% and
Europe up 3%. The U.S. air conditioning business increased
moderately, with mid-single-digit growth in residential markets and
low-single-digit growth in the commercial business. Strong demand
in China drove the boost in Asia, led by the refrigeration,
solutions and temperature sensors businesses. Market conditions
continued to improve in Europe.
Revenues in the Commercial
& Residential Solutions segment grew 1%, as harsh
winter weather led to a 1% decline in the U.S., which was more than
offset by 8% growth in international markets. Strong growth in the
professional tools, wet/dry vacuums and food waste disposers
businesses countered declines in the storage businesses. After a
slow start to the year, U.S. residential and commercial
construction markets are expected to improve, supporting stronger
growth in the second half.
Margins
For the second quarter of fiscal
2014, gross profit margin expanded 140 basis points (bps) to 41.2%,
attributable to portfolio changes and cost containment efforts. The
operating margin for the quarter also expanded 110 bps to 14.1%
versus the prior-year quarter.
Balance Sheet & Cash
Flow
Exiting the quarter, the company
had cash and cash equivalents of $2.7 billion with a long-term debt
of $3.8 billion. Net cash from operating activities were $1.3
million compared with $1.2 million during the prior-year
period.
Outlook
Along with the earnings release,
the company has reaffirmed its outlook for fiscal 2014. The company
continues to expect the earnings per share in the range $3.68−$3.80
reflecting an increase of 4%−7% or an increase of 33%−38% on a
reported basis.
The underlying sales are likely to
grow in the range of 3%−5% while net sales can span anywhere
between a decline of 1% to an increase of 1% given the impact of
acquisitions, divestitures and currency translation on the
business.
The company expects the operating
margins to increase by 0.5% driven by change in business mix and
increasing volumes. However, the increasing strategic investments
made by the company might prove to be a drag for the company’s
margins.
Emerson currently has a Zacks Rank
#3 (Hold). Some better-ranked stocks worth considering include
Energy Transfer Equity, L.P.
(ETE), Enterprise Products Partners L.P. (EPD) and
Targa Resources Partners LP (NGLS). All three of
the stocks carry a Zacks Rank #2 (Buy).
EMERSON ELEC CO (EMR): Free Stock Analysis Report
ENTERPRISE PROD (EPD): Free Stock Analysis Report
ENERGY TRAN EQT (ETE): Free Stock Analysis Report
TARGA RESOURCES (NGLS): Free Stock Analysis Report
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