Emerson's Earnings Weren't Anything To Go Writing Home About

May.27.14 | About: Emerson Electric (EMR)

Summary

Revenues declined but earnings were flat thanks to financial engineering.

The stock is fairly valued on 2015 earnings estimates.

The decrease in revenue was due to the Artesyn divestiture.

The last time I wrote about Emerson Electric Co. (NYSE:EMR) I stated:

"Due to the fair valuation on next year's earnings, low dividend yield, and expensive valuation on growth potential I'm not going to be buying a position at this price." Since that article was published the stock is up 3.08% while the S&P 500 (NYSEARCA:SPY) is up 3.37%. Emerson is a diversified global technology company which is engaged in designing and supplying products and technology, and delivering engineering services and solutions in the industrial and commercial worlds.

The company reported earnings before the market opened on 06May14 and on the surface the results were bad with the company reporting earnings of $0.80 per share (missing estimates by $0.01) on revenue of $5.81 billion (missing estimates by $90 million). The stock decreased 1.57% the day it reported earnings and what I'd like to do at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Segment Revenue

Segment Sales (millions)

2FQ14

1FQ14

2FQ13

Q/Q

Y/Y

Process Management

$ 2,108

$ 2,041

$ 2,020

-1%

4%

Industrial Automation

$ 1,232

$ 1,149

$ 1,213

6%

2%

Network Power

$ 1,171

$ 1,303

$ 1,481

14%

-21%

Climate Technologies

$ 1,041

$ 786

$ 988

26%

5%

Commercial & Residential Solutions

$ 460

$ 466

$ 457

-2%

1%

Eliminations

$ (200)

$ (139)

$ (199)

43%

1%

Net Sales

$ 5,812

$ 5,606

$ 5,960

4%

-2%

Click to enlarge

Compared to last year total revenue has decreased by 2%. The only thing of note is the 21% reduction in the Network Power segment which accounts for 20% of total revenues. The reason for the massive drop in the segment was due to the Artesyn divestiture deducting 21% of sales and currency translation reducing 1%.

Income Statement

Income Statement

2FQ14

1FQ14

2FQ13

Q/Q

Y/Y

Net Sales

$ 5,812

$ 5,606

$ 5,960

4%

-2%

Cost of sales

$ 3,417

$ 3,370

$ 3,587

1%

-5%

SG&A expenses

$ 1,394

$ 1,444

$ 1,426

-3%

-2%

Other deductions, net

$ 137

$ 95

$ 59

44%

132%

Interest expense, net

$ 47

$ 54

$ 57

-13%

-18%

Earnings before income taxes

$ 817

$ 643

$ 831

27%

-2%

Income taxes

$ 263

$ 166

$ 253

58%

4%

Net Earnings

$ 554

$ 477

$ 578

16%

-4%

Less: Noncontrolling interests in earnings of subsidiaries

$ 7

$ 15

$ 17

-53%

-59%

Net earnings common shareholders

$ 547

$ 462

$ 561

18%

-2%

Avg. diluted shares outstanding

705.2

708.1

725.3

0%

-3%

EPS due to acquisition costs

 

$ 0.02

 

-100%

N/A

Diluted earnings per share

$ 0.78

$ 0.67

$ 0.77

15%

0%

Click to enlarge

With the 2% decrease on the top-line I'd expect the bottom line to exhibit the same characteristics but it didn't, the bottom line was flat-lined. I'd like to see why that was the case by diving into the income statement. We immediately see a 132% increase to other deductions and an 18% reduction in interest expenses bringing an overall reduction of 2% to earnings before taxes. After taking into consideration taxes there was a 4% decrease in earnings. When you subtract the 59% drop in noncontrolling interests in earnings the net earnings to common shareholders was at a drop of 2%. Thankfully the earnings were flat-lined as a result of the 3% reduction in shares from the prior year.

Balance Sheet

Balance Sheet

2FQ14

1FQ14

2FQ13

Q/Q

Y/Y

Cash and equivalents

$ 2,724

$ 2,737

$ 2,615

0%

4%

Receivables, net

$ 4,563

$ 4,429

$ 4,559

3%

0%

Inventories

$ 2,233

$ 2,162

$ 2,327

3%

-4%

Other current assets

$ 683

$ 671

$ 688

2%

-1%

Total current assets

$ 10,203

$ 9,999

$ 10,189

2%

0%

Property, plant & equipment, net

$ 3,692

$ 3,639

$ 3,481

1%

6%

Goodwill

$ 7,875

$ 7,871

$ 8,007

0%

-2%

Other intangible assets

$ 1,810

$ 1,839

$ 1,734

-2%

4%

Other

$ 766

$ 776

$ 313

-1%

145%

Total assets

$ 24,346

$ 24,124

$ 23,724

1%

3%

Short-term borrowings and current maturities of long-term debt

$ 2,661

$ 1,958

$ 1,485

36%

79%

Accounts payable

$ 2,522

$ 2,425

$ 2,460

4%

3%

Accrued expenses

$ 2,583

$ 2,526

$ 2,651

2%

-3%

Income taxes

$ 66

$ 199

$ 48

-67%

38%

Total current liabilities

$ 7,832

$ 7,108

$ 6,644

10%

18%

Long-term debt

$ 3,836

$ 3,834

$ 4,059

0%

-5%

Other liabilities

$ 2,153

$ 2,299

$ 2,347

-6%

-8%

Total equity

$ 10,525

$ 10,883

$ 10,674

-3%

-1%

Total liabilities and equity

$ 24,346

$ 24,124

$ 23,724

1%

3%

Click to enlarge

From a balance sheet perspective I don't see too much going on for the asset side of the equation as total current assets were flat from last year. Other long-term assets increased by 145% helping total assets increase by 3%.

On the liability side of the equation there was a 79% increase to short-term borrowings and current maturities of long-term debt and 38% increase to income taxes which brought total current liabilities to an 18% increase from last year. Overall liabilities increased only 3% though.

Conclusion

The company reported earnings which were flat when compared to a year ago on 2% less revenue while the share price was up 4.1% since the last earnings call. These were mediocre to me because I don't like to see declining revenue but at least there is an explanation for it. The stock is one of the smaller positions in my dividend portfolio but if the yield can get a bit higher I'll probably be buying more shares. The company did reiterate 2014 guidance of $3.68 to $3.80 per share with net sales of -1% to 1%. The company stated that robust orders growth in the first quarter shows evidence that there continues to be improvement in the global macroeconomic environment. That being said, I think the stock is fairly valued and I'll be buying on any dips. With these results the stock is on my team but on the bench.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long EMR, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.