On Jan 3, we reiterated our Neutral recommendation on Emerson Electric Company (EMR) largely due to its modest fourth quarter performance. We prefer to remain on the sidelines until we see substantial organic growth and improvement in the overall industry environment.
Why a Neutral Recommendation?
On Nov 25, Emerson reported fourth-quarter 2013 earnings per share of $1.18 a share, which was 6.3% above the Zacks Consensus Estimate of $1.11. The company’s earnings surged 203% year over year. Despite a sluggish economy, underlying growth across the company’s markets and segments remained strong during the quarter.
The company’s modest operational execution and healthy returns from restructuring initiatives led to its growth. During the reported quarter, Emerson’s revenues increased in regions like Latin America, Middle-East, Asia, Canada, Europe and Africa; whereas underlying sales declined in major economies like the U.S.
The company is well-positioned to benefit from the long-term global trends of infrastructure spending and improved energy efficiency. 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. Also, increasing investments in North America are likely to have a positive impact on the company’s business.
Going forward, Emerson’s cost-cutting and restructuring initiatives are expected to significantly benefit the company. For the last two years, Emerson is focusing on reducing costs while boosting profits.The company is also focusing on redeployment of capital in core areas by divesting underperforming assets like its business in embedded power and computing systems.
However, Emerson’s business is more prone to global economic and political risks as its operations are spread across the world, majority of which are outside the U.S. The European economy continues to appear weak, as the recovery process has been slow after the sovereign debt crisis. Moreover, as oil-prices are on a decline, the company’s business in Middle-East is likely to be impacted negatively.
In the reported quarter, the company was impacted by 2% drop in sales owing to sluggish economic conditions in mature markets, including U.S.. Moreover, revenues declined in two of its five operating segments. In the quarter, the company also had to take additional impairment charges for the ongoing divestment of its embedded, computing and power business.
Thus, we prefer to remain on the sidelines and maintain our Neutral recommendation on Emerson.
Other Stocks to Consider
Emerson currently holds a Zacks Rank #3 (Hold). Some better-ranked stocks in the oil & gas and utilities sector include EnerSys (ENS), Pioneer Power Solutions, Inc. (PPSI) and Alamo Group, Inc. (ALG). EnerSys and Pioneer Power Solutions both carry a Zacks Rank #1 (Strong Buy), while Alamo Group carries a Zacks Rank #2 (Buy).
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