Emerson Earnings: Strong Quarter Doesn’t Alter Long-Term View; Demand Remains Strong

Wide-moat-rated Emerson Electric EMR had a strong fiscal third quarter. That said, nothing materially alters our long-term point of view. We lift our fair value estimate to $105 from $103, but the raise is due to time value of money. Our forecast remains essentially unchanged, though there were some puts and takes in our full-year 2023 figures that mostly canceled one another out.

Fiscal third-quarter revenue of $3.95 billion, which rose 13% organically, was mostly in-line, though Emerson’s control systems and software business certainly came out a bit ahead. GAAP operating margins of 19.3% were a bit better as well (50 basis points better than expected), though the benefits were mostly on the software and control side, as AspenTech flipped positive (on operating profitability), while control systems and software benefited from the additional volumes. We are pleased with these results, though the stock is less attractive to us on a price/fair value basis, with the stock rallying 4% after results.

As with many other industrials in our coverage, sales growth is now outpacing order growth, suggesting Emerson’s supply chain pains are improving, and it’s better able to deliver on its outstanding orders. Indeed, the numbers match management’s narrative that addressed better availability of electronic components, which allowed Emerson to work through its backlog and reduce its lead times. We consider this a positive development, particularly given the continued order strength.

While underlying orders only rose 3%, Emerson’s process and hybrid markets experienced high-single-digit order growth; discrete was the partial offset. More importantly, moving forward, management still expects mid-single-digit full-year order growth, with “significant momentum” in Emerson’s hybrid markets (specifically, life sciences and metals and mining). Reshoring trends are driving the life sciences activity, while lithium and battery metals are driving investments in hybrid.