One of the advantages of a diversified company like Emerson Electric (NYSE:EMR) is that weak growth in some parts of its business can be offset with stronger growth elsewhere. One of the disadvantages is that it's very difficult to avoid a weak area in the global economy.
In truth, the company is never going to see all of its businesses firing on all cylinders at the same time. In other words, investors should take a balanced approach when looking at its recent first-quarter results, so let's try to do that now.
Emerson Electric reports first-quarter earnings
If the story of the global industrial economy in 2014 was about the shift in relative growth prospects between an accelerating U.S. and a slowing emerging-market economy -- particularly the BRICs -- then the first quarter has been about three things: oil prices, a weak Europe, and the effects of a stronger dollar in U.S. company earnings -- and a strong dollar means the dollar value of foreign currency revenue gets reduced.
In a somewhat familiar refrain for an industrial company reporting in the first quarter, Emerson's management discussed all three factors, as well as made some cautionary commentary and guidance for the full year.
Currency effects have already started to take their toll. Emerson's underlying sales growth was 6% in the first quarter, and currency and a divestiture reduced earnings by 3% apiece, meaning reported sales growth came in flat.
The impact of the stronger dollar can also be seen in the company's guidance: The prediction for stronger underlying sales growth of 3%-5% for the full year is counterbalanced by a forecast reduction in reported sales of 4%-5% due to currency translation. Throw in the expected 2% decline in sales from the Power Solutions divestiture and reported sales are expected to decline by 1%-4%.
The divergence in growth prospects between the U.S. and other parts of the world can be seen in Emerson's figures for underlying sales growth in the first quarter.
|Region/Country||Underlying Sales Growth|
Looking ahead, Emerson's management expects "continued weakness in Europe and some emerging markets." Frankly, it's difficult for anyone to predict what will happen in Europe, as the region's growth prospects are overshadowed by ongoing geopolitical (Ukraine/Russian peoples) and politico-economic (Greece and the Eurozone) uncertainties.
Interesting commentary on oil
In Emerson's third-quarter earnings, CEO David Farr warned that oil prices slipping "into the $60s, into the $50s" would significantly impact customer behavior, and speculated that the impact could start to be seen in the "early 2015 calendar quarter if the price of oil stays down."
Fast-forward to the first-quarter earnings call, in which Farr said: "The big issue right now would be what I'm seeing happening to our major oil and gas customers and they are definitely starting to cut back and we're starting to see that."
If you look at Emerson Electric's end market exposure, oil and gas (within its process management segment) is its largest single end market. As such, when Farr was asked a question about oil and gas on the earnings call, he replied: "The total process marketplace, I think we're going to have a window here of the 12 months going to be down 2% to 3%." And later on he said, "There [are] definitely going to be two quarters that are going to be tough. Is our next quarter going to be one of them? It's hard for me to tell right now from the reaction around the world."
Emerson Electric investors should brace themselves for some difficult quarters in process management in 2015.
It's not all bad
While the three issues above are obvious concerns, management's forecast for 3%-5% underlying sales growth (a reduction from the 4%-5% forecast in its fourth-quarter results) in 2015 is still stronger than the 3% figure reported for full-year 2014.
Furthermore, being a diversified company, Emerson has good growth prospects in areas such as U.S. commercial and residential construction (commercial and residential solutions segments, climate technologies) as well as North American industrial automation.
Moreover, management announced plans to accelerate restructuring of the company in order to reposition its cost structure. The original plan was for $50 million worth of restructuring, but management increased the figure to $100 million. According to Farr, the benefits could be seen in the second half of its fiscal year 2015.
All told, there are some concerns with the company in 2015, and end market conditions have clearly gotten worse, but a balanced viewpoint also looks at the positives, and Emerson's sales growth target is definitely one of them.