Emerson Electric's (EMR 0.05%) fiscal-year 2015 proved challenging, to say the least. Reductions in energy capital expenditures, adverse currency movements, and emerging-market weakness combined to reduce full-year net sales by 9% and adjusted EPS by 15%. As the company enters its fiscal 2016, investors will be hoping to see some improvement. With this in mind, here are five things that management wants you to know about its future prospects.
Momentum will change
On the fourth-quarter earnings call, CEO David Farr outlined his belief the company would only see underlying sales growth turn positive in 2016: "We just incurred our third negative underlying sales growth and we will have two more."
In order to graphically express what he's saying, I've compiled a chart of underlying sales growth. The estimated figures for the first two quarters of 2016 represent the midpoint of the ranges he communicated on the earnings call.
Data source: Emerson Electric presentations.
I've discussed how and why Farr believes Emerson Electric can return to positive underlying sales growth in the third quarter of 2016. Suffice it to say that if the company manages to achieve a turnaround in underlying sales then -- even if earnings are flat overall in 2016 -- the stock will start to look like it has earnings momentum at this time next year.
Self-help strategy
When end markets aren't helping much, and revenue is turning down, it's usually a good idea to adjust to the reality and restructure the business. Indeed, Emerson Electric's management has been restructuring significantly and also plans a spinoff of its Network Power operations in 2016. Farr said on the earnings release:
In 2015 we successfully divested our Power Transmission Solutions and InterMetro businesses to strategic buyers achieving a good return for our shareholders. In 2016, our repositioning efforts will be focused on the successful spinoff of Network Power and the potential sale of our Motors and Drives and Power Generation businesses.
In addition, the company spent $221 million on restructuring in 2015 with another $60 million to $70 million planned for 2016. Moreover, Farr outlined that the measures taken in 2015 "will provide approximately $250 million of benefit for the Company in 2016."
Chinese takeaway
The country's prospects loom large for any industrial company, and it's worth dwelling on Farr's view of how 2016 will pan out. First, let's take a look at underlying sales growth in China for Emerson Electric in its 2015.
| Segment |
Q1 2015 |
Q2 2015 |
Q3 2015 |
Q4 2015 |
|---|---|---|---|---|
|
Process management |
3% |
(1%) |
(13%) |
(5%) |
|
Industrial automation |
6% |
0% |
(4%) |
(8%) |
|
Network power |
(1%) |
(6%) |
(28%) |
(13%) |
|
Climate tech |
(3%) |
(12%) |
(4%) |
(27%) |
|
Comm. & res solutions |
(12%) |
(12%) |
(7%) |
9% |
|
Total |
1% |
(5%) |
(14%) |
(18%) |
Data source: Emerson Electric presentations.
In answering a question from Barclays Capital analyst Scott Davis on the earnings call, Farr stated his belief that inventory destocking had been going on, and "right now I think the worst of that is behind us."
However, he still expects China sales to be down by around 3% to 5% in 2016, with double-digit underlying sales declines (15% and 10%) in the first two quarters of 2016.
Cash flow
Despite a 15% reduction in adjusted EPS, Emerson Electric still put in a credible performance in terms of cash flow generation. Having generated $2.93 billion -- or 11.9% of sales -- of free cash flow (operating cash flow minus capital expenditures) in 2014, Emerson Electric's cash flow was under pressure in 2015 due to deteriorating earnings.
While the reported free cash flow came in at just $1.84 billion, Farr was keen to point out that "we did generate nearly $3 billion of operating cash flow when you adjust for the extra taxes we paid for the divestitures."
Indeed, adjusting for $424 million paid in taxes for the divestiture would result in free cash flow of around $2.27 billion, or 10.2% of sales -- less than in 2014, but still not bad. It's worth noting that the adjusted free cash flow would have covered Emerson's dividends paid by 1.7 times.
Dividends and buybacks
I've touched on the subject above, and given that the company sports a near-4% yield and has increased the dividend for 59 years in a row, investors will surely be interested to hear that the company is planning more increases and buybacks.
Farr on the earnings release announced "a new program authorizing the repurchase of 70 million shares over the next several years and an increase in the first quarter dividend to an annualized rate of $1.90 per share."
Summing up
If all goes according to management's expectations in 2016, then a snapshot of Emerson Electric at this time next year would look like a company with recovering earnings, a generous and well-supported yield, and one that has recently divested some non-core businesses. In other words, it's a lot healthier-looking than it is today.
