Diversified industrial conglomerate Emerson (NYSE:EMR) submitted its first-quarter 2019 earnings report on Tuesday. Three months into the new fiscal year, Emerson hit the low end of its full-year underlying revenue growth target range and tweaked earnings expectations slightly higher.
With one caveat, which we'll discuss in a moment, management believes demand for the company's products and services should remain vibrant in 2019.
Note that all comparative numbers we'll be looking at are presented against the prior-year quarter, the first quarter of fiscal 2018.
Emerson: The raw numbers
|Metric||Q1 2019||Q1 2018||Change (YOY)|
|Revenue||$4.15 billion||$3.82 billion||8.6%|
|Net income||$465 million||$392 million||18.6%|
|Diluted earnings per share||$0.74||$0.61||11.5%|
What happened this quarter?
Net sales in the company's automation solutions segment improved by 8.8% to $2.8 billion. The business enjoyed a positive impact of 4% from acquisitions while parrying a 2% headwind from foreign currency fluctuations, resulting in 7 percentage points of underlying growth. Management cited vigorous repair and maintenance demand, as well as brownfield investment activity centering on the optimization and expansion of existing customer facilities, as major factors behind the positive results.
In Emerson's second major segment, commercial and residential solutions, net sales increased by 7% to $1.3 billion. This advance consisted of a 9% boost from acquisitions, offset by a 1% drag from currency impact. Thus, underlying sales declined by a single percentage point. Underlying sales growth of 8% in the Americas and 3% in Europe was undercut by a 23% decrease in the Asia, Middle East, and Africa region.
Within this region, sales in China slid 30% because of weaker heat and air conditioning markets. However, management expects that excess channel inventory will be absorbed next quarter. Higher spending patterns and an easier comparison against the prior year should also help support underlying revenue growth in China next quarter.
Taken together, the two segments' total reported revenue advance of 8.6% equates to 4.5% of underlying top-line growth, which sits at the low end of a full-year 2019 underlying revenue expansion target of 4%-7%.
As for profitability, Emerson's gross margin improved roughly 20 basis points to 42.5%, as revenue from multiple acquisitions over the past year offset materials cost increases and impacts from tariffs. Removing the effect of acquired revenue, both automation solutions and commercial and residential solutions experienced margin declines over the past three months. Management indicated in the company's earnings conference call that it's implementing price increases where feasible to bring price-cost relationships more in line with historical trends.
Emerson continues to plow forward with its growth through acquisitions strategy. The company closed on its purchase of liquified natural gas valve technology specialist Advanced Engineering Valves (A.E. Valves) in December and completed its acquisition of General Electric's Intelligent Platforms business on Feb. 1. The former GE business will provide Emerson with programmable logic controller technologies used in machine control and automation. Located in Charlottesville, Va., the business counts 650 employees worldwide and generated $210 million in revenue in 2017. Terms of the deal haven't yet been disclosed.
What management had to say
In Emerson's earnings press release, CEO David Farr reiterated a point made in previous quarters: Despite macroeconomic uncertainty, the company is experiencing brisk demand and relatively benign conditions in its industrial businesses:
Our results in the first quarter provide a solid start to 2019 and confirmed our view of the global macroeconomic backdrop we laid out during our November earnings conference call, including our 4 to 7 percent underlying sales guidance. Importantly, we continue to see strength across our global industrial end markets and demand for our technology, products, and expertise. We're also pleased to have completed $0.8 billion in share repurchases in the quarter and $1 billion through January to reach our full-year target. As expected, our Commercial & Residential Solutions business felt the crosswinds of weakening consumer demand in China that began in the second half of 2018. We continue to watch the situation carefully, and we are optimistic our China Commercial & Residential Solutions team will achieve positive underlying orders and sales in the second half of 2019.
Emerson raised its fiscal 2019 revenue forecast range slightly, from 6%-9% expansion to 7%-10% growth against fiscal 2018. Underlying growth net of acquisitions and currency effects, however, is still expected to advance between 4% and 7%. During the company's earnings call, Farr explained that uncertainty around the company's Chinese commercial and residential solutions operations is keeping the low end of projected underlying growth at 4%.
Management anticipates diluted earnings per share (EPS) growth of $3.60-$3.75 in fiscal 2019, a slight upward revision from its previous guidance of $3.55-$3.70. The EPS numbers include $0.03 in acquisition charges against the A.E. Valves and Intelligent Platforms transactions. Given the caveat of an expected though still uncertain recovery in China, investors should probably wait for at least another quarter before placing high confidence in Emerson's fiscal 2019 EPS projections.