EPD Enterprise Products Partners LP

Emerson Electric Company (EMR) reported fiscal second quarter 2014 results, ended Mar 31, 2014. Excluding one-time items, earnings for the quarter came in at 80 cents per share compared with 77 cents per share in the year-ago period. Quarterly earnings were below the Zacks Consensus Estimate of 82 cents.

Despite macroeconomic headwinds, year-over-year profits benefited from the improvement in the company’s business driven by the accelerated growth conditions in the emerging markets.

Revenue

Total revenue was down 2.5% year over year to $5.8 billion. However, organic sales in the quarter increased 2% despite a negative 5% impact from the Artesyn divestiture, which was again partially offset by a favorable 1% impact from acquisition. Marginal growth in organic sales was due to unfavorable orders timing, disruptive winter weather and weak first quarter GDP growth in the U.S. and slower implementation of large projects in the global process industry.

Geographically, the U.S. grew 3%, while Asia rose 4%, with China up 9%. Europe was up marginally by 1%, while the Middle East/Africa declined 9%.

Nevertheless, orders increased 9% reflecting stronger market conditions, particularly towards the end of the quarter. The order growth in March was driven above 15%, benefiting from large, multi-year industrial projects, recovering demand for capital goods and improvement in the U.S., Europe, and Asia. Revenues fell short of the Zacks Consensus Estimate of $5.9 billion.

Segment Results

Process Management segment’s net sales grew by 4.4% while it’s underlying sales increased by 1%. Global oil and gas, power and chemical markets continued to drive revenue growth for the segment. Orders increased 12% in the quarter, driving up backlog and providing momentum for growth into next year. By geography, underlying sales in the U.S. grew 8%. Europe was up 4%, while Asia declined 1%, due to weakness and difficult comparisons in India and Australia, which were offset by continued strength in China.

The Industrial Automation segment reported a 1.6% increase in revenues driven by an improved demand for capital goods (up 6%), particularly in emerging markets. The U.S. and Europe were flat, as sales across mature markets were flat year over year. However, Asia grew 6%, with robust growth in China. Modest growth in the fluid automation motors and drives, electrical distribution, and hermetic motors businesses offset moderate declines in the mechanical power transmission and power generating alternators businesses. Order trends increased significantly in February and March across the segment, led by double-digit growth in the power generating alternators business, thereby supporting the expectation for sales growth improvement in the second half of the year.

Network Power revenues contracted 21% despite a 1% increase in the underlying sales. Revenues were lowered by a 21% reduction in sales owing to Artesyn divestiture and 1% reduction in top line due to unfavorable currency translation. Organic sales in the U.S. grew 1%, while Europe decreased 3% and Asia increased 4%. Global telecommunications infrastructure business experienced solid growth, led by North America and Europe. The segment reported mixed demand in data center markets, as growth in Asia and North America was more than offset by weakness in Europe and Latin America. However, the company anticipates modest growth in 2014, with an expected increase in robust orders while multi-year projects strengthened backlog and provies momentum into next year.

Revenues in the Climate Technologies division increased 5.4% year over year driven by strength in global refrigeration markets and transportation. Underlying sales grew about 6%, as currency translation impacted the top line by less than 1%, with the U.S. up 2%, Asia up 11% and Europe up 3%. The U.S. air conditioning business increased moderately, with mid-single-digit growth in residential markets and low-single-digit growth in the commercial business. Strong demand in China drove the boost in Asia, led by the refrigeration, solutions and temperature sensors businesses. Market conditions continued to improve in Europe.

Revenues in the Commercial & Residential Solutions segment grew 1%, as harsh winter weather led to a 1% decline in the U.S., which was more than offset by 8% growth in international markets. Strong growth in the professional tools, wet/dry vacuums and food waste disposers businesses countered declines in the storage businesses. After a slow start to the year, U.S. residential and commercial construction markets are expected to improve, supporting stronger growth in the second half.

Margins

For the second quarter of fiscal 2014, gross profit margin expanded 140 basis points (bps) to 41.2%, attributable to portfolio changes and cost containment efforts. The operating margin for the quarter also expanded 110 bps to 14.1% versus the prior-year quarter.

Balance Sheet & Cash Flow

Exiting the quarter, the company had cash and cash equivalents of $2.7 billion with a long-term debt of $3.8 billion. Net cash from operating activities were $1.3 million compared with $1.2 million during the prior-year period.

Outlook                                                                          

Along with the earnings release, the company has reaffirmed its outlook for fiscal 2014. The company continues to expect the earnings per share in the range $3.68−$3.80 reflecting an increase of 4%−7% or an increase of 33%−38% on a reported basis.

The underlying sales are likely to grow in the range of 3%−5% while net sales can span anywhere between a decline of 1% to an increase of 1% given the impact of acquisitions, divestitures and currency translation on the business.

The company expects the operating margins to increase by 0.5% driven by change in business mix and increasing volumes. However, the increasing strategic investments made by the company might prove to be a drag for the company’s margins.

Emerson currently has a Zacks Rank #3 (Hold). Some better-ranked stocks worth considering include Energy Transfer Equity, L.P. (ETE), Enterprise Products Partners L.P. (EPD) and Targa Resources Partners LP (NGLS). All three of the stocks carry a Zacks Rank #2 (Buy).

 
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