It's been a pretty good earnings season for the industrials sector. Particularly so for companies with heavy exposure to oil & gas related capital spending. As such, expectations were for a good set of results from Emerson Electric Co. (NYSE:EMR), and the company didn't disappoint with its earnings report on Tuesday. For the second time this year, CEO David Farr raised guidance and served notice that the dividend investors' favorite is on an improving uptrend. Let's take a look at what happened in Emerson Electric's second quarter.

Emerson Electric second-quarter earnings: The raw numbers

Starting with the headline numbers from the quarter compared to last year's second quarter:

  • Reported and underlying sales were flat at $3.57 billion compared to guidance for underlying sales to decline by 2% to 1%. 
  • Operating earnings from continuing operations increased 2% to $565 million.
  • EPS from continuing operations increased 2% to $0.58.

Flat sales growth and earnings up 2% may not appear to be anything to write home about, but management increased full-year guidance across the board. Moreover, Emerson Electric has had negative underlying sales growth since the third quarter of 2015, so the return to growth would be a welcome turnaround.

a processing plant

Image source: Getty Images.

Guidance increase

Turning to the specifics of guidance, there was good news all around:

  • Full-year underlying sales growth is now expected to be 1% compared to previous guidance of down 2% to flat -- note the company started the fiscal year expecting underlying sales to decline 3% to 1%.
  • Full-year automation solutions underlying sales is now expected to decline 3% to 2%, compared with previous guidance for a 5% to 3% decline.
  • Full-year commercial and residential solutions underlying sales is now expected to increase 5% to 6% compared to previous guidance for growth of 3% to 5%. 
  • Third-quarter underlying sales growth is now expected to increase 4% to 5% compared to previous guidance for 0% to 1%. 

The improvement in the automation solutions segment might have been expected given the positive reporting of other companies with oil & gas exposure such as Dover Corp (NYSE:DOV), and with companies with automation and processing exposure such as Honeywell International (NASDAQ:HON).  However, the increase in guidance in the commercial and residential solutions segment -- led by a 13% increase in Asia in the quarter, with China up 20% -- was somewhat more surprising.

Indeed, the positive trends are confirmed when looking at Emerson Electric's monthly order trends.

Segment November December January February March
Automation Solutions (15%) to (10%) (10%) to (5%) 0% 0% 0% to 5%
Commercial & Residential Solutions 5% to 10% 5% to 10% 0% to 5% 0% to 5% 0% to 5%
Total (10%) to (5%) (5%) to 0% 0% to 5% 0% to 5% 0% to 5%

Data source: Emerson Electric presentations. Chart by author.

A note on full-year earnings guidance

While overall end markets are improving for the company, it might be somewhat surprising to see that full-year EPS guidance was only increased by 2.1% at the midpoint of the range. Specifically, management now sees full-year continuing EPS in the range of $2.55 to $2.65 compared to previous guidance for $2.47 to $2.62.

Part of the reason for this is relatively higher corporate costs in the third quarter compared to the same period last year. Farr discussed the issue on the earnings call so as to prepare investors: "We had an artificially low corporate cost benefit last year by the tune of almost about $30 million from the standpoint of one-time benefits we got last year." He went on to summarize EPS prospects for the third quarter: "And we will, I'm telling you right now, we will be plus or minus flat $0.01 or $0.02, flat from last year's EPS."

Looking ahead

It was a good set of earnings from Emerson Electric, and the end-market guidance is encouraging. Farr has been premature in predicting recoveries before, but then again, he wouldn't be alone in doing that in the oil & gas arena. No matter, the company has been under-promising and over-delivering in 2017, and that's usually a good thing for investors. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.