Emerson Electric Co.’s (EMR) third quarter 2010 earnings result, released before the opening bell today, were below the Zacks Consensus Estimate on the top and bottom line. Earnings per share from continuing operations of 75 cents increased 12% year over year, but underperformed the Zacks Consensus Estimate of 78 cents. In the last quarter, Emerson had surpassed the Zacks Consensus Estimate by 10 cents.
Earnings result in the quarter was negatively impacted by 4 cents from the acquisition of Chloride Group plc and by 2 cents from the inclusion of Motors to discontinued operations. On a reported basis, earnings in the quarter increased by 46% to 98 cents. The company’s expanded results were derived from a continued recovery in the global markets and rising demand for Emerson’s products.
For fiscal 2010, earnings per share from continuing operations was $2.60, up 15% year over year but below the Zacks Consensus Estimate of $2.66.
Revenue
Total revenue was $5.8 billion, up 14% year over year, but was below the Zacks Consensus Estimate of $5.9 billion. Excluding 3% benefit from acquisitions and 1% negative impact from foreign currency exchange, revenue increased by 12%. Emerson witnessed a global improvement, with revenue growth accelerating in the US (up 9%) as well as in Europe (up 15%). In Asia, revenue continued to increase, reflecting growth of 14% and was up 11% in Latin America.
The company’s revenue increased in all its segments in the quarter, with Industrial Automation revenue and Network Power revenue both increasing by 23% year over year. Climate Technologies revenue spiked 11% and Process Management revenue surged 5%. Tools and Storage revenue was least impressive, growing at 2% on a year-over-year basis, as growth in tools and disposer businesses was partially offset by weak residential storage business.
Of the total revenue ($21.0 billion, up 5%) generated in fiscal 2010, 57% was from international markets, particularly the emerging markets that comprise 34% of total revenue.
The company’s earnings from continuing operations before income taxes was $2.9 billion compared with $2.5 billion in the fourth quarter of fiscal 2009.
Climate Technologies’ margin was 19.2% (up 2.4 points), Industrial Automation’s margin was 16.3% (up 6 points), Tools and Storage margin stood at 20.7% (down 0.1 point), Network Power’s margin came in at 15.2% (up 1.9 points) and Process Management’s margin was 19.1% (up 1.6 points).
Balance Sheet and Cash Flow
Cash and cash equivalents was $1.6 billion with long-term debt of $4.6 billion and shareowner’s equity of $10 billion.
The company generated operating cash flow of $3.3 billion during fiscal 2010. With capital expenditures of $524 million, free cash flow amounted to $2.8 billion (128% of net earnings common stockholders). This was the tenth successive year in which the company recorded free cash flow of above 100% of net earnings common stockholders.
Outlook
The company’s results for the year are quite impressive, supported by an improving global market environment, effective cost management, successful launch of new product and technologies, wise geographic expansion and a healthy product mix. The strong performance in 2010 strengthens the company’s confidence for delivering better results in fiscal 2011.
For fiscal 2011, Emerson expects underlying sales growth in the range of 7–10% and reported sales growth of 12–15%. Operating profit margin is expected to be in the range of 17.2–17.5% and pre-tax margin between 14.2–14.7%. Operating cash flow is expected to be around $3.4–$3.5 billion.
The company continues to invest in breakthrough technologies, expand its geographic presence and improve the cost structure of the business, both organically and through acquisitions. The addition of Chloride helps Emerson to further expand its activity worldwide and broaden its portfolio of power supply products.
We anticipate that the emerging markets will continue to outperform mature markets. Furthermore, the emerging markets could recover faster than the USand Europe. Major competitors of Emerson are ABB Ltd. (ABB), General Electric Co. (GE) and Hitachi Ltd. (HIT).
Based in St. Louis, Missouri, Emerson Electric Co. is a diversified global manufacturing and technology company. It offers a wide range of products and services in the areas of process management, climate technologies, network power, storage solutions, professional tools, appliance solutions, motor technologies, and industrial automation.
We currently maintain our Neutral recommendation on Emerson Electric Co, with a Zacks #3 Rank over the next one-to-three months.
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