Emerson In-Line, Optimistic Guidance - Analyst Blog

Emerson Electric Company (EMR) released its first quarter 2012 earnings results, reporting earnings per share from continuing operation of 50 cents, in line with the Zacks Consensus Estimate. Earnings for the quarter were down 21.0% year over year. Profits continue to be impacted by damage caused by the Thailand floods.

Total revenue was $5.3 billion, down 4% year over year. Underlying sales also declined 4% with U.S. sales down 4% and total international sales down 3%. Supply chain disruptions due to the flooding in Thailand continued to affect Process Management and to a lesser extent Network Power, in total delaying about $300 million of revenue,. However, the company expects to recover most of it in fiscal 2012.

In addition, Investment deferrals by U.S. telecommunications carriers, global HVAC channel inventory destocking, residential construction weakness in the U.S. and China, and European economic uncertainty also led to a contraction of the top line.

Segment Results

The Industrial Automation segment witnessed a sales growth rate of 2%, primarily due to stable demand of capital goods across its end markets and also due to favorable pricing. Underlying sales also grew 2%, with Europe surging 5% and Asia increasing 2%. Sales were flat in the U.S., due to weakness in the hermetic motors business, driven by a sharp decline in compressor demand.

Sales in the Network Power segment declined 10 percent, primarily attributable to weakness in telecommunications and information technology end markets. Underlying sales also decreased 10%, with the U.S. contracting 17%, Asia declining 6% and Europe down 10%.

Demand in the embedded computing and power business also declined substantially, as global customers were significantly affected by Thailand flooding, telecommunications and information technology end markets reflected broad weakness, and the product line rationalization also continued.

Revenue in the Process Management segment was also significantly affected by supply chain disruption caused by flooding in Thailand and it restricted the availability of electronics components. However, the supply has been restored to a large extent and the overall impact to 2012 results are expected to me marginal as the company intends to focus on reducing its record level of backlog over the next three quarters.

Total and underlying sales decreased 1%, with the U.S. flat, Asia down 8% and Europe up 6%, while total orders in the quarter increased 15% year over year.

Climate Technologies sales declined 9% during the quarter, due to broad weakness across the segment. Underlying sales also decreased 9%, with the U.S. down 5%, Europe down 11% and Asia declining 21%. U.S. and China residential air conditioning end market weakness was due to channel inventory reductions, while European markets were a challenge because of the economic headwind in the region.

China residential and light commercial construction has weakened in the last five months as the government curtailed investments to restrain inflation.

Balance Sheet

Operating cash flow of $334 million in the quarter increased 4%, as lower investment in working capital compared with the prior year quarter more than offset the earnings decline. The company had a long-term debt of $4.3 billion with a debt-to-capitalization ratio of 30%.

Outlook

Although, the company had a tough start to the year, Emerson is optimistic about its outlook for 2012. The positive outlook is based on the company’s strong fundamentals in the industrial businesses and management expectations for improvement in telecommunications and HVAC end markets and recovery from the Thailand flooding disruptions.

However, these partially offset by the impact of deterioration in the European economy and mixed global economic indicators.

Therefore, the company has revised its outlook for fiscal 2012. Emerson now expects Underlying sales and orders growth 4% to 6% and sales growth of 2% to 4%. The operating profit margin is expected at approximately 18% while pretax margin is expected at approximately 15.5%.

For fiscal 2012, earnings are expected to be in the range of $3.45 to $3.60 a share. Operating cash flow for 2012 is expected to be at approximately $3.5 billion while capital expenditures are expected at $700 million.

Founded in St. Louis in 1890, Emerson is the largest publicly traded company in Missouri. The major competitors of Emerson are ABB Ltd. (ABB), General Electric Co. (GE) and Hitachi Ltd. (HIT).

The company has a Zacks #4 Rank which implies a short-term ‘Sell’ recommendation.

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