Emerson Earnings: Strong Quarter, but Moderating Discrete Orders and AspenTech Noise Give Us Pause
While wide-moat-rated Emerson Electric’s EMR fiscal second-quarter results were very solid and easily surpassed our expectations for the quarter, we maintain our $103 fair value estimate. Consolidated revenue of $3.76 billion beat our expectations by about 5%, while adjusted EPS of $1.09 surpassed what we penciled in by over 11%. While we’re pleased with core Emerson’s results, AspenTech underperformed both its initial guide and what our covering analyst was modeling. This gives us pause because one of our general concerns with Emerson is its spotty history of integration and overpaying for assets, despite the strong strategic rationales for its past deals.
In fact, this is why we’re especially nervous about Emerson’s overpayment for National Instruments, because to us, the acquisition math eliminates any potential margin of safety. AspenTech management on its call pointed out that some of the assets Emerson contributed (particularly OSI) had lower annual contract value upon further review than it initially appreciated. While these were for contracts prior to Emerson acquiring OSI, it only furthers the importance for financial discipline when pursuing mergers and acquisitions. Given our cautious outlook, we essentially pulled forward our estimates, but our view on Emerson’s growth algorithm remains the same, despite the multipronged beat. Nevertheless, the stock remains one of our stronger ideas in a U.S. multi-industrial category with few bargains.
During the quarter, consolidated revenue rose just under 14% on an underlying basis, year on year. As we were hoping to see, adjusted EBITA improved considerably, or about 350 basis points year on year, or 360 basis points sequentially. We’re glad to see that the sequential margin ramp was even better than we were modeling, as Emerson moved ahead of what we typically expect to see in the fiscal second quarter. In turn, adjusted EPS rose just over 25%.
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