Why Is Emerson Electric (EMR) Down 12.3% Since Last Earnings Report?

A month has gone by since the last earnings report for Emerson Electric (NYSE:EMR). Shares have lost about 12.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Emerson Electric due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Emerson's Q1 Earnings Meet Estimates, Decrease Y/Y

Emerson’s first-quarter fiscal 2020 (ended Dec 31, 2019) earnings of 67 cents per share came in line with the Zacks Consensus Estimate. Notably, the company’s earnings had matched estimates in the last reported quarter as well. On a year-over-year basis, the bottom line decreased 9.5% from 74 cents.

Organic Sales and Acquired Assets Drive Revenues

Emerson’s revenues were $4,151 million in the quarter, reflecting marginal growth of 0.1% from the year-ago quarter. Underlying sales were flat. Acquired assets boosted sales by 1% but forex woes had a 1% adverse impact.

However, the top line lagged the Zacks Consensus Estimate of $4,166 million.

The company reports net sales under two segments — Automation Solutions, and Commercial & Residential Solutions. Fiscal first-quarter segmental results are briefly discussed below:

Automation Solutions revenues were $2,852 million, increasing 1.9% year over year. Underlying sales grew 1% while acquired assets boosted sales by 2%. Forex woes adversely impacted sales by 1%.

Commercial & Residential Solutions generated revenues of $1,303 million in the fiscal first quarter, down 3% year over year. Underlying sales were down 1%, while divestitures had an adverse impact of 1% on sales. Forex woes adversely impacted sales by 1%. Under this segment, Climate Technologies’ sales declined 0.8% year over year to $873 million while that from Tools & Home Products decreased 6.1% to $430 million.

Gross Margin

In the quarter under review, Emerson's cost of sales increased 0.3% year over year to $2,392 million. It represented 57.6% of net revenues compared with 57.5% in the year-ago quarter. Gross margin was relatively flat at 42.4%. Selling, general and administrative expenses (SG&A) expanded 4.3% to $1,123 million. As a percentage of sales, SG&A expenses were 27.1%, up from 26%.

Balance Sheet and Cash Flow

Exiting the fiscal first quarter, Emerson had cash and cash equivalents of $1,635 million, up from $1,248 million at the end of year-ago quarter. Long-term debt balance increased 52.1% to $4,018 million. During the first three months of fiscal 2020, the company repaid debts of $502 million.

In the quarter, it generated net cash of $424 million from operating activities, reflecting increase of 31.3% from the year-ago quarter. Capital expenditure was $114 million, down from $155 million.

During the first three months of fiscal 2020, the company paid dividends amounting $305 million and repurchased shares worth $129 million.

Outlook

For fiscal 2020 (ending September 2020), the company anticipates net sales in the range of a 2% decline to 2% increase. Underlying sales are expected to be in the band of 2% decline to 2% increase.

Earnings per share are predicted to be $3.55-$3.80 for fiscal 2020.

Emerson estimates Automation Solutions net sales to be in the band of 1% decline to 3% increase, while Commercial & Residential Solutions net sales are projected in the range of 4% decline to breakeven.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

At this time, Emerson Electric has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Emerson Electric has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.