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Why Emerson Electric Stock Jumped 20% in April

By Reuben Gregg Brewer - May 6, 2020 at 9:17AM

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It was a good month for the market -- and Emerson did even better -- but don't read too much into that move.

What happened

Shares of global industrial giant Emerson Electric (EMR 1.98%) rose 20% in April, according to data from S&P Global Market Intelligence. For most of the month, the stock tracked the broader market, which was up around 13% in April. However, after Emerson reported earnings on April 21, shares sprinted ahead of the S&P 500. This isn't an issue of reporting good earnings, though; it was more like earnings weren't as bad as they could have been.   

So what

Emerson reported a 9% decline in revenue for its fiscal second quarter 2020. Earnings were $0.84 per share, roughly flat with the year-ago period. Pull out restructuring charges, however, and the bottom line increased to $0.89 per share -- toward the high end of management's guidance. That's the good news and investors were clearly pleased that Emerson was able to achieve these results.   

Two men wearing hard hats looking at blueprints over factory floor

Image source: Getty Images

However, there was notable bad news in the quarter. For example, management highlighted that "demand declined significantly in March due to the rapid spread of COVID-19." Broadly speaking, then, the top-line slump was largely because of one month, which helps explain why Emerson updated its full-year 2020 guidance to include a sales drop of between 9% and 11%. Adjusted earnings guidance was reduced to $3.00 to $3.20 per share for the year versus the prior range of $3.55 to $3.80 per share. That's a 15% downward revision.  

Clearly, Emerson is expecting the rest of the year to be pretty rough. At the high end of the new range, if you pull out first-quarter adjusted earnings, it suggests adjusted earnings of $0.77 per share per quarter for the rest of the year, indicating that adjusted earnings will drop at least 13% from Q1's level. At the low end, quarterly adjusted earnings will fall to $0.70 per share, a roughly 20% decline. Earnings ebb and flow, so this bit of math is an obvious oversimplification, but it gives you an idea of how uncertain the economic environment is today.  

Now what

Emerson is a well-run company with an incredible history. It's highly likely to make it through this challenging environment without too much difficulty. However, long-term investors should listen to management here: COVID-19 is going to have a material impact on this global industrial giant. Expect more difficult quarterly comparisons ahead.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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