Given that Emerson Electric (EMR 0.72%) had preannounced its fourth-quarter earnings a few weeks back, the focus of the earnings report was always going to be on forward-looking considerations such as guidance and orders in the quarter. Moreover, Emerson's confirmation that it had approached Rockwell Automation (ROK 0.93%) with a proposal to combine the businesses -- a potential deal often discussed in the investment community -- shines the spotlight even more brightly on Emerson's plans.
With that in mind, let's look at the earnings and guidance from the earnings report.
Emerson Electric's roots lie deep in the heart of U.S. manufacturing. Image source: Emerson Electric.
Emerson Electric's fourth quarter: The raw numbers
Emerson preannounced earnings in October in response to concerns over the impact of hurricanes on its earnings. Management described the storm as having had only a moderate effect on sales, and the headline numbers contained few surprises.
- Full-year net sales of $15.3 billion represented a reported increase of 5% and underlying sales growth of 1% and were in line with the preannouncement and guidance from last quarter.
- Adjusted EPS of $2.64 was in line with preannouncement guidance and therefore ahead of the $2.58-$2.62 guidance from the third quarter.
- Operating cash flow of $2.7 billion and free cash flow (FCF) of $2.2 billion were both in line with the preannouncement: Operating cash flow was better than the "$2.5 billion-plus" expectation given on the third-quarter earnings call.
The FCF figure of $2.2 billion is a good result for the company and provides significant cover for the nearly $1.2 billion paid in dividends. It means Emerson Electric is likely to maintain its status as one of the most attractive high-yield Dividend Aristocrats on the market -- an important point to consider, given that the Rockwell approach suggests that management is prepared to invest significant sums in corporate actions.
What happened in the quarter
While the headline numbers provided few surprises, breaking out the earnings by segment reveals some interesting color. Full-year sales growth in automation solutions -- 53% of segment earnings -- came in at the high end of guidance, but commercial and residential solutions sales, the remaining 47%, were below the midpoint of guidance. Moreover, margin performance at commercial and residential solutions was also slightly disappointing.
| Segment |
Full-Year Sales Growth |
Guidance at Q3 |
Fourth-Quarter EBIT Margin |
Change (basis points) |
|---|---|---|---|---|
|
Automation solutions |
4.9% |
4%-5% |
20.2%* |
300 |
|
Commercial and residential solutions |
5.4% |
5%-6% |
23.5% |
(110) |
Data source: Emerson Electric presentations. *Excluding valves and controls acquisition activity. EBIT = earnings before interest and taxes. 100 basis points = 1%.
The sales weakness in the fourth quarter was attributed to a 1% decline in North America sales, resulting from "cooler temperatures compared with prior year and the negative impact of hurricanes," according to the earnings presentation. Meanwhile, the 110-basis-point decline in EBIT margin was attributed to a combination of a negative impact from a divestiture (50 basis points) and "slower U.S. compressor replacement business." However, management expects to recover these sales in the next 12 months.
Automation solutions had a strong quarter, with orders growing strongly. Here's a look at trailing-three-month orders:
|
Segment |
April |
May |
June |
July |
August |
September |
|---|---|---|---|---|---|---|
|
Automation solutions |
0% to 5% |
5% to 10% |
5% to 10% |
15% |
10% to 15% |
15% to 20% |
|
Commercial and residential solutions |
0% to 5% |
5% to 10% |
5% to 10% |
5% to 10% |
5% to 10% |
5% to 10% |
|
Total |
0% to 5% |
5% to 10% |
5% to 10% |
10% to 15% |
10% |
10% to 15% |
Data solutions: Emerson Electric presentations.
2018 full-year guidance
Turning to the crucial matter of full-year guidance: CEO David Farr expects net sales growth of 8%-10% in Emerson's fiscal 2018, with underlying sales growth of 4%-6%. Breaking out the guidance by segment, Farr expects the roles to reverse and automation solutions to drive growth, with 5%-7% underlying sales growth, compared with commercial and residential solutions underlying sales growth of 3%-5%.
Operating cash flow is forecast to increase 4% to $2.8 billion, while guidance for adjusted EPS in the range of $2.75-$2.95 represents growth in the range of 4.2%-11.7%.
Looking ahead
Emerson's order growth and guidance imply that the company is set for a strong 2018, but the elephant in the room is the ongoing situation regarding Rockwell Automation. Farr didn't answer questions on the matter on the earnings call but made it clear he views Rockwell as an ideal fit for Emerson. With or without Rockwell, Emerson has good earnings momentum.
