Emerson Electric (EMR 2.13%) was already having a difficult 2015, but unfortunately it just got a bit worse with its third-quarter results. The company continued its three-quarter-long streak of lowering its underlying revenue guidance, and management continued to caution investors that market conditions are likely to remain difficult for the next year. Let's take a closer look at the underlying trends in the results, and the pressures building up on the company.
A difficult third-quarter
A look at the headline numbers:
- Third-quarter sales declined 13% to $5.5 billion compared to analyst estimates for $5.63 billion
- Third-quarter EPS of $0.84 compared to analyst estimates for $0.83
As you can see above, third-quarter revenue came in lower than expectations but EPS beat analyst estimates. And now guidance:
- Full-year EPS guidance of $3.97-$4.07 compared to previous guidance $4.17-$4.32
- Full-year underlying sales expected to decline 2% compared to previous guidance of an increase of 0%-2%
- Full-year net-sales expected to decline 9%
The headline guidance deserves extra consideration for three reasons.
First, the EPS guidance quoted above includes $0.77 of positive contribution from the power transmission solutions divestiture, so if you are comparing it to the analyst consensus of $3.35, then adjusted updated EPS range is $3.20-$3.30 -- lower than the analyst consensus.
Second, the EPS guidance cut follows on from the second quarter where EPS guidance was cut to $4.17-$4.32 from $4.50-$4.60. Moreover, the cut in underlying sales guidance is the third this year. The company started the year with a forecast of 4%-5%, only to lower it to a range of 3%-5% in the first quarter, and then 0%-2% in the second-quarter earnings -- you've already seen how guidance was lowered in the third quarter.
Third, I've referenced underlying sales as a better metric to look at, because the stronger U.S. dollar -- which reduces the Dollar value of foreign earnings -- continues to negatively impact reported sales. For example, reported net sales were down 13% but 5% was due to unfavorable currency movements.
End-market headwinds
Turning to the specifics of the quarter, CEO David Farr outlined a gloomy assessment of current market conditions: "The third quarter was an extension of the challenges and market headwinds that have affected our business over the past two quarters, with an increasingly negative impact on results," and he went on to outline that conditions wouldn't get much better anytime soon:
"We expect difficult market conditions to continue over the next 3 to 4 quarters as global spending remains under pressure from the uncertainty in oil prices and sluggish growth in capital spending across many mature and emerging markets."
Essentially, the company has suffered from a congruence of market headwinds. Lower energy prices have hit sales of its upstream oil and gas solutions within its key Process Management segment. I've already discussed currency effects. Meanwhile, the weakness in emerging markets has hit infrastructural spending in certain countries. Throw in the reluctance of companies and Governments to engage in significant capital spending in the current environment, and it's almost a perfect storm.
In fact, Emerson Electric is not the only company to report the reluctance of companies/Governments to make capital expenditures. For example, industrial bellwether Illinois Tool Works' management spoke of a "weak capital spending environment"
U.S. sales shift
However, the most significant development this year has been the shift in its U.S. prospects. At the time of the first-quarter I wrote about how the company was becoming increasingly reliant on growth in its U.S. sales. As you can see in the linked article, in the first quarter U.S. underlying sales growth was 8% compared to just 1% in Europe and Asia.
Fast-forward to the third quarter and U.S. sales declined 7%, with Europe down 2% and Asia down 7%. Focusing on its three most important segments, North America underlying sales declined 5% in Process Management, with an 11% reduction in Industrial Automation, and a 6% decline in Climate Technologies. In fact, the only positive underlying sales increase across all the segments was in Commercial and Residential Solutions.
|
Third Quarter |
Underlying Sales Growth |
Earnings ($millions) |
|---|---|---|
|
Process Management |
-4% |
373 |
|
Network Power |
-11% |
37 |
|
Industrial Automation |
-5% |
156 |
|
Climate Technologies |
-3% |
222 |
|
Commercial & Residential Solutions |
1% |
98 |
SOURCE: EMERSON ELECTRIC PRESENTATIONS.
The takeaway
End market conditions have worsened for Emerson Electric throughout 2015, and the negative shifts in the company's guidance have reflected this fact. Moreover, management's outlook continues to be cautious, which is hardly surprising given that four out of five segments reported declining underlying sales growth in the quarter.
