Emerson Underperforms Estimates - Analyst Blog

Emerson Electric Company (EMR) released its first quarter 2011 earnings results before the opening bell today, reporting earnings per share from continuing operation of 63 cents, below the Zacks Consensus Estimate of 65 cents. Earnings for the quarter were up 15% year over year.

Total revenue was $5.5 billion, up 15% year over year. Excluding a 5% benefit from acquisitions and a negative impact of 1% from currency fluctuations, underlying sales growth was 11%. Sales in the USincreased 10% and international sales shot up 11%.

Segment Results

The Industrial Automation segment witnessed the highest sales growth rate of 23% followed by Network Power of 21%, Process Management of 12% and 3% in both Climate Technologies and Tools and Storage. Underlying sales growth was 24%, 6%, 13%, 4% and 3% in Industrial Automation, Network Power, Process Management, Climate Technologies and Tools and Storage, respectively.

Margins

Operating margin in the quarter was 15.4%, an increase of 40 bps year over year. Margins in the quarter benefited from increased volume and the company's restructuring and cost reallocation efforts, which more than offset rising material costs.

Segment-wise operating margins were up in all the business segments but for Network Power that suffered a 4.0 percentage point decline to 10.9%. The shortfall was due to a $25 million rise in amortization from the Chloride and Avocent acquisitions, other costs to the tune of $15 million related to the Chloride acquisition, negative pricing and accelerating costs for materials.

Balance Sheet

Exiting the first quarter 2011, Emerson had cash and cash equivalents of approximately $1.49 billion compared with $1.84 million at the end of first quarter 2010. Long-term debt was $4.35 billion and total equity was $10.32 billion.

Net cash flow from operating activities was approximately $322 million and capital expenditure amounted to $82 million in the quarter.

Outlook

Emerson expects its fiscal 2011 earnings per share in the range of $3.15 to $3.30 and total revenue in the range of $24 billion to $24.5 billion, up 14% to 17% year over year. Operating margin is expected to come in a band of 17.4% to 17.7%.

The company's focus on maintaining a strong balance sheet and cash flow position would help in new business investments, expand technical expertise and globalize its assets.

Emerson offers a broad portfolio of products and services to its customers across a wide range of industries. 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. Avocent and Chloride contributed 15% to Network Power sales in the reported quarter.

On the flip side, substantial sales abroad are subject to economic shocks. Results of operations may also be adversely affected by foreign currency fluctuations. Operating results of the company depend on continued successful research, development and marketing of new or improved products and services.

Management is restructuring and repositioning the company to combat global economic meltdown and, as a consequence, incurring restructuring charges that impact net earnings.

Emerson Electric Company 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.

Founded in St. Louisin 1890, Emerson is the largest publicly traded company in Missouri. Major competitors of Emerson are ABB Ltd. (ABB), General Electric Co. (GE) and Hitachi Ltd. (HIT).

We currently maintain a Neutral rating on Emerson, with a Zacks #3 Rank (short-term Hold recommendation).