Emerson: The Direct Beneficiary Of Positive Future Outlook

| About: Emerson Electric (EMR)
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Summary

Holding a market leading position in the industry, Emerson posted a positive growth of 3% in underlying sales as the global economy began to recover.

Highest increase in backlog of more than 20% as the orders received went up by 5% indicates a healthy growth to be seen in the upcoming quarter’s revenue base.

Adjusted EBIT margin increased by 90 basis points to 17.70% during the third quarter of 2014.

Based on the company’s positive future outlook and its market leading position in the industry, Emerson stands to be the direct beneficiary of the recovering macroeconomic environment.

Emerson is earning 13.6% higher return on equity compared to the industry’s normal level.

Many players in the industrial electrical equipment industry have reported negative earnings surprises in their recent earning releases on the back of a weak economic environment. The same expectations were being associated with Emerson Electric Co. (NYSE:EMR) as it is grappling with the same circumstances at present. Recently, the company has announced its third quarter results for the fiscal year 2014.

Let's take a look at how the company has performed recently and its future growth prospects.

Recent Performance At A Glance

Source: Emerson's Market Share

The company's top line experienced a decline of 1% in the third quarter of fiscal year 2014 compared to the same period a year ago due to the impact of divestiture of Artesyn (-5%), net of acquisitions (1%). Holding a market leading position in the industry, Emerson posted a positive growth of 3% in its underlying sales as the global economy has begun to recover although at a slow and uneven pace. There was progress seen in the mature markets like US (5%) and Europe (4%) while emerging markets faced low demand due to the political and economic uncertainty that prevailed during the period.

The company achieved the highest increase in its backlog of more than 20% as the orders received went up by 5%. This indicates a healthy growth to be seen in the upcoming quarter's revenue base as the company delivers the orders accepted.

The gross profit margin has shown an expansion of 130 basis points as the company continued to work on its portfolio alignment by focusing on value adding businesses and divesting from inefficient areas which were contributing comparatively lower profits along with cost curtailment.

Source: Investor Presentation

Adjusted EBIT margin increased by 90 basis points to 17.70% during the third quarter of 2014 up from 16.80% during the same period last year due to a cut down of $22 million in the restructuring costs and as the improvement in gross margin trickled downwards.

On the face of it, EPS showed a staggering increase of 281% during the most recent quarter compared to the corresponding period of the previous year. However, adjusted EPS revealed an improvement of 6% which eliminated the extraordinary impairment item.

Future Outlook

Overall, the global macroeconomic environment is showing signs of improvement. However, uncertainty still seems to prevail in some markets. The number of orders is projected to go up in the upcoming quarter and is anticipated to fall in the range of 5-7% primarily driven by the recovery in emerging markets and strengthening demand in the United States. The fortifying demand in North America, projected revival of demand in Asia and record backlog are expected to translate into robust growth for Process Management segment of the company.

Secondly, the market conditions for Industrial Automation department are also gradually picking up particularly in Europe and the Middle East. Additionally, backlog growth and recovering market conditions are likely to translate into decent growth for its Network Power segment.

Furthermore, Climate Technologies also has a favorable outlook on the back of recovering demand for air conditioners in the US region. Also, the recovery of the residential and commercial construction is likely to support the growth momentum in Commercial and Residential Solutions.

The lower than expected economic environment in the beginning quarters is likely to result in the target achievement of the lower end of the range predicted for the full fiscal year 2014 i.e. 3% underlying sales growth and EPS of $3.68. The CFO to net income ratio of 1.29 achieved in 2014 supports the strong cash generation capacity of Emerson and supports the CFO outlook of nearly $3.5 billion.

Conclusion

Based on the company's positive future outlook and its market leading position in the industry, Emerson stands to be the direct beneficiary of the recovering macroeconomic environment. Moreover, the stock is also undervalued as it is trading at a P/E "ttm" of 18.03x while the industry average stands to be 23.04. Emerson is also earning 13.6% higher return on equity compared to the industry's normal level. Additionally, the stock is also offering a healthy dividend yield of 2.67% while others are able to give out only 1.03%.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.