Climate Technologies (14.3%) provides heating, air conditioning, and refrigeration solutions.

Transcription

1 December 08, 2014 Emerson Electric Co. Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 05/14/2006 Current Price (12/05/14) $64.88 Target Price $ Week High $ Week Low $58.67 One-Year Return (%) Beta 1.29 Average Daily Volume (sh) 2,792,358 Shares Outstanding (mil) 694 Market Capitalization ($mil) $45,027 Short Interest Ratio (days) 3.11 Institutional Ownership (%) 72 Insider Ownership (%) 1 Annual Cash Dividend $1.88 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 3.9 Earnings Per Share (%) 10.1 Dividend (%) 6.7 using TTM EPS 17.1 using 2015 Estimate 16.2 using 2016 Estimate 15.0 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page SUMMARY Risk Level * (EMR-NYSE) Emerson Electric is a global technological solutions provider for industrial, commercial and consumer markets. We are reaffirming our Neutral recommendation with a target price of $68. The company s business benefited from the accelerated growth conditions in emerging markets like China. The company has also received several multi-year industrial contracts from the U.S., Europe and Asia in the last quarter. Furthermore, Emerson has been taking efforts to enhance its Process Management segment by forming joint ventures to develop innovative tools like XLReporter. However, the unfavorable currency translations and the ongoing political instability and economic uncertainty in certain regions remain concerns. Nevertheless, the company has issued an encouraging outlook for the rest of fiscal Low, Type of Stock Large-Growth Industry Mach-Electrical Zacks Industry Rank * 179 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Dec) (Mar) (Jun) (Sep) (Sep) ,553 A 5,960 A 6,344 A 6,812 A 24,669 A ,606 A 5,812 A 6,312 A 6,807 A 24,537 A ,624 E 5,934 E 6,406 E 6,925 E 24,889 E ,896 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Dec) (Mar) (Jun) (Sep) (Sep) 2013 $0.62 A $0.77 A $0.97 A $1.18 A $3.54 A 2014 $0.67 A $0.80 A $1.03 A $1.30 A $3.80 A 2015 $0.74 E $0.87 E $1.07 E $1.32 E $4.00 E 2016 $4.33 E Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Emerson Electric Company (EMR) 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. The company has 240 worldwide manufacturing locations, out of which 160 are located outside the U.S. Emerson conducts its business in more than 150 countries. The company organizes its business into five operating segments: Process Management (35.5% of the total revenue in fiscal 2013) provides intelligent control systems and software, measurement instruments, valves, and industry expertise. Network Power (26.4%) provides power backup systems, embedded power, precision cooling, and connectivity technologies for data centers, telecommunications networks, and other applications. Industrial Automation (19.4%) manufactures fluid automation systems, materials joining equipment, mechanical and electrical drives, industrial electrical products, and power generation technologies. Climate Technologies (14.3%) provides heating, air conditioning, and refrigeration solutions. Commercial & Residential Solutions (7.0%) provides construction and facility maintenance tools and storage systems for diverse sectors like infrastructure, healthcare and environment. REASONS TO BUY The company is well-positioned to benefit from the long-term global trends of infrastructure spending and improved energy efficiency. This is because as emerging economies grow, they increasingly invest in the infrastructure necessary to support a modern economy. Moreover, as per the latest indicators, the infrastructure industry in the U.S. is also on a path to recovery. The company s residential segment and especially its air conditioning, professional tools and food waste disposer businesses are likely to benefit from increasing investments in North America. Emerson is also expected to benefit from the steady adoption of central air conditioning in Asia, driven by the emerging middle class and broader energy efficiency initiatives. EMR s cost cutting and restructuring initiatives are expected to benefit the company going forward. For the last two years, EMR is focusing on reducing costs while boosting profits and margins significantly. In the last quarter, the company s gross margin expanded 140 basis points, reflecting the positive impact of the ongoing restructuring initiatives and portfolio changes. The company is also focusing on redeployment of its capital in core areas by divesting the underperforming assets like its connectivity solutions business, which it sold off to Bel Fuse. Emerson Electric has been generating strong free cash flow for the last few quarters. Year to date in 2014, Emerson generated an operating cash flow growth of 4%, driven by efficient working capital management. Further, the company has issued an encouraging outlook of generating cash flow worth $3.5 in fiscal Management has stated that the company will engage in mergers and acquisitions to tap growth opportunities. This influenced it to grow its business and helped it to gain access to new technologies and markets across geographies. Recently, the company has acquired leading reliability consulting services firm, Management Resources Group, to strengthen its Process Management division s asset management capabilities. The strategic acquisition of Management Resources Group will not only Equity Research EMR Page 2

3 complement Emerson s monitoring and predictive diagnostic technologies but will also enable Emerson to help customers resolve reliability problems and strengthen its asset-reliability consultation. REASONS TO SELL Substantial sales in the international market are subject to economic risks. Results of operations are affected by foreign currency fluctuations and the global economic scenario. These macroeconomic conditions are impacting the levels of capital invested in the business and a significant portion of Emerson s revenues is generated by the infrastructure related end markets, which are depended on the capital investment and credit situation in the market. The company s operations are spread across the world, majority of which are outside the United States. Therefore, they are more prone to global economic and political risks. The European economy continues to appear weak, as the recovery process has been slow after the last crisis. The ongoing unrest in Crimea and Iraq can also have an adverse impact on the company s business, both regions being rich in oil and gas resources. Management is restructuring and repositioning the company to combat impacts due to global economic meltdown and, as a consequence, restructuring charges are negatively impacting net earnings. In the quarter, the company had to take additional impairment charges pertaining to the divestment of Artesyn. In the second quarter of 2014, the divesture lowered sales by almost 5%. Given the company s international exposure, Emerson is subject to risks related to fluctuations in international currency. RECENT NEWS Emerson Receives Shah Deniz Stage 2 Contract from BP Nov 6, 2014 Emerson Electric Co s (EMR - Analyst Report) Process Management division was recently selected as the main automation contractor for the Shah Deniz Stage 2 development project in the Azerbaijan sector of the Caspian Sea. Valued over $40 million, the contract was awarded by BP p.l.c. (BP) and involves the installation of integrated control and safety systems to help ensure safe and efficient control of gas production on two new offshore platforms. Emerson will also provide automation control and technology. Moreover, this contract is part of Emerson s global agreement with BP to provide services for greenfield automation projects. Per the contract, Emerson will provide system engineering, installation, configuration and testing, assisted by the local Emerson-Azerbaijan service center in Baku. Emerson intends to deploy its DeltaV system of control and its AMS Suite predictive maintenance software for the Shah Deniz Stage 2 development project. The company s DeltaV system will control and monitor onshore, topside and subsea operations while its DeltaV SIS system will perform process and emergency shutdown job (when required), in addition to fire control systems and gas detection systems, allowing secure gas production. This apart, Emerson s AMS Suite software will convey prognostic corrective measures from the control and measurement devices to facilitate corrective maintenance on time. Notably, Emerson s Process Management division primarily provides intelligent control systems and software, measurement instruments, valves and is one of the main revenue drivers for the company. In the last reported quarter (fourth quarter of 2014), the segment reported revenue growth of 8% year over year. Equity Research EMR Page 3

4 Emerson Q4 Earnings Top, Revenues Meet; Outlook Good Nov 4, 2014 Emerson Electric Company reported fourth-quarter and fiscal 2014 results, ended Sep 30, Excluding one-time items, earnings for the quarter came in at $1.30 per share which was up 10% from the year-ago quarter. Also, quarterly earnings beat the Zacks Consensus Estimate of $1.22 by 6.6%. For fiscal 2014, the company reported Non-GAAP earnings of $3.75 a share which was up 6% year over year. Full year earnings were well above the Zacks Consensus Estimate of $3.70. Revenues Total revenue was flat year over year at $6.8 billion and was in line with the Zacks Consensus Estimate. However, organic sales in the quarter increased 4%, offset by divestitures and unfavorable currency translation. The upside in organic sales can be attributed to improved business conditions across all segments. Geographically, revenues in the U.S. improved 8% reflecting better economic conditions while Asia revenues inched up a mere 2% owing to slow growth in China. However, emerging market revenues grew a meaningful 5%. Europe revenues were flat year over year owing to weak market conditions. Orders grew a healthy 9% reflecting enhanced market conditions. Revenues for fiscal 2014 came in at $24.5 billion, which were down marginally year over year. However, organic sales were up 3% driven by a favorable contribution of 1% from acquisitions, which was offset by divestitures. Segment Results Net sales for the fourth quarter at the Process Management segment grew 8%, with organic sales up 5%, attributable to continued strength in global energy and chemical markets. The segment reported strong growth in North America, revenues at which surged 13% as investments in oil and gas production and processing projects remained strong. On a geographic basis, the segment s performance highlighted mixed results. Asia revenues were up 1%, primarily supported by strength in Southeast Asia while India sales were marred by declines in Australia and China due to challenging comparisons. Although Europe revenues were flat, Russia demonstrated considerable improvement. The Industrial Automation segment reported 5% increase in the quarter, driven by improved demand for capital goods but remained mixed across markets. Geographically, North America revenues were up 12%, Asia sales garnered a 5% improvement. On the other hand, Europe revenues deteriorated 2%. During the quarter under review, growth was led by the HVAC-related hermetic motors business, which recorded over 20% revenue growth, attributable to strength in the electrical distribution. The segment reported growth across all categories except for motors and drives, which reported a marginal decline reflecting weaknesses in Europe. Net sales in the Network Power segment contracted 20% owing to the Artesyn divestiture. However, underlying sales grew 1% with North America revenues up 1%, Asia down 3% and Europe escalating 7%. The segment reported increased demand for data center solutions globally, driven by heightened project activities in Europe and favorable economic conditions in North America. On the other hand, the telecommunications infrastructure business slowed down, plummeting at a double-digit rate. Equity Research EMR Page 4

5 Revenues in the Climate Technologies segment expanded 7% in the quarter, as 7% growth in North America and 8% growth in Asia more than offset a 3% decline in Europe. The air conditioning business in North America was robust, with residential revenues witnessing more than 20% growth on demand acceleration related to regulatory changes effective Jan 1, 2015, along with improved commercial market conditions. Business in Asia benefited from continued momentum in China, which was up 7% on robust growth in the refrigeration business. Europe revenues deteriorated as economic conditions softened. Also, demand for sensors and controls decreased moderately. Commercial & Residential Solutions sales grew 5%, marking the strongest quarter of the year for the segment. This increase was driven by 7% growth in North America revenues which was offset by a slight decline in international sales. Growth was aided by strength in the professional tools, wet/dry vacuums and food waste disposers businesses. Margins In the fourth quarter of fiscal 2014, gross profit margin expanded 120 basis points to 42.4%, with strong improvement in the Process Management and Industrial Automation segments. Balance Sheet & Cash Flow Exiting the year, the company had cash and cash equivalents of $3.3 billion with long-term debt of $4.1 billion. Meanwhile, net cash from operating activities totaled $3.6 million. Outlook Along with the earnings release, Emerson Electric provided an outlook for fiscal The company expects underlying sales growth between 4% and 5% in fiscal 2015, better than in 2014, with unfavorable currency translation and the potential power transmission divestiture both deducting 2% each. Meanwhile, sales growth is expected to remain flat or increase a marginal 1%. VALUATION EMR s current trailing 12-month earnings multiple is 17.1x compared with the 18.1x average for the peer group and 19.0x for the S&P 500. Over the last five years, the company s shares have traded in the range of 12.8x to 22.4x trailing 12-month earnings. Our long term Neutral recommendation indicates that the company will perform in line with the broader market. Our target price is $68.00 or 17.0x 2015 EPS, which is in the middle of the historical range. Equity Research EMR Page 5

6 Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Emerson Electric Co. (EMR) Industry Average S&P ABB Ltd (ABB) Chapeau Inc. (CPEU) Eaton Corporation plc (ETN) Regal Beloit Corporation (RBC) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA EMERSON ELEC CO (EMR) Industry Average S&P Equity Research EMR Page 6

7 Earnings Surprise and Estimate Revision History Equity Research EMR Page 7

8 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of EMR. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1138 companies covered: Outperform %, Neutral %, Underperform 6.2%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research EMR Page 8