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We’re downgrading Emerson Electric on inconsistent execution
Industrial technology company Emerson Electric ‘s (EMR) disappointing quarterly results Tuesday highlighted management’s inability to execute on a consistent basis, forcing us to downgrade our rating on the stock and lower our price target. Revenue for the three months ended Sept. 30 increased 5% year-over-year, to $4.09 billion, but missed analysts’ forecasts of $4.19 billion, according to LSEG. Adjusted earnings-per-share (EPS) jumped 21% on an annual basis, to $1.29, while falling short of expectations of $1.31 per share. Emerson stock tumbled 7.7% Tuesday, to trade around $84.60 a share. Bottom line This was not the fiscal fourth quarter we were looking for. We had wanted to see consistency following two strong quarters that came after a rocky start to the year, but Emerson Electric didn’t deliver. Adjusted earnings before interest, taxes and amortization (EBITA) and cash flow were bright spots, while the company’s backlog – a leading indicator of sales – did increase 12% year-over-year. But that was all over shadowed by misses on sales, weak underlying growth, and a suboptimal outlook for the current quarter and fiscal year 2024. For the current quarter, the sales forecast was solid, even as the earnings guidance came up short. On a full-year basis, sales and earnings forecasts fell short of expectations, as did cash-flow-generation targets. For fiscal 2024, the company said its “process and hybrid end markets remain strong, driven by secular trends like energy security, sustainability and decarbonization, nearshoring and digital transformation.” But management also said Tuesday that discrete markets are at a different stage in the business cycle, noting that orders remain under pressure and aren’t expected to rebound until the back half of fiscal 2024. Given the lack of consistency from management and disappointing outlook we are cutting our price target to $100 a share, down from $110, representing 19-times the company’s five-year historical average. We are also downgrading shares to a 3 rating , meaning we would sell into strength and potentially look to exit our position. In short, there are better places in which to put money to work as we look to the new year, those with management teams that execute on a consistent basis. Companywide results Overall sales fell short of analysts’ estimates and underlying sales growth — excluding the impact of currency fluctuations, and significant acquisitions and divestitures — also came up short versus expectations. Sales at the measurement and analytical subsegment of the intelligent devices unit was the only bright spot. At the same time, EBITA came in belter than expected on the back of roughly 80 basis points of margin expansion, while EPS still came in below Wall Street’s estimates. Cash flow was better than expected but not enough to offset the weakness elsewhere. Moreover, guidance was mixed at best — even though Emerson exited its fiscal 2023 with a $6.6 billion backlog, up 12% on the prior year, aided by an acceleration in underlying order growth. Guidance Looking ahead, management’s forecast for the current quarter pointed to a better than expected sales result, however its earnings guidance came up short. On a full-year basis, expectations for underlying sales growth and full-year earnings bracketed expectations. But the outlook wasn’t quite what the Street had predicted, with underlying sales growth and earnings forecasts missing at the midpoint, while sales and cash-flow targets came up short even at the higher end of the provided guidance range. “Energy transition, industrial software, life sciences and metal and mining are expected to remain resilient parts of our portfolio,” and though “discrete markets are down in both our factory automation and test and measurement, we are seeing recovery in the second half of the year,” CEO Surendralal Karsanbhai said Tuesday. The full-year earnings forecast includes a 35 to 40 cent contribution from the acquisition of National Instruments, though the bulls may have been looking for a bit more. We had concerns about the acquisition from the start, arguing that management paid too high a price to close the deal. (Jim Cramer’s Charitable Trust is long EMR. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Workers produce some of the specialized valves at Emerson Electric Co.’s factory in Marshalltown, Iowa, July 26, 2018.
Timothy Aeppel | Reuters
Industrial technology company Emerson Electric‘s (EMR) disappointing quarterly results Tuesday highlighted management’s inability to execute on a consistent basis, forcing us to downgrade our rating on the stock and lower our price target.
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