Sometimes momentum is bad because it cuts both ways. Slow and steady wins the race.
EMR - Emerson Electric - Company Profile
Emerson Electric designs and manufactures products and provides services to industrial, commercial and consumer markets worldwide. They cater to all areas of industry with electrical measurement and control products, power generation products and automation of critical energy infrastructure.
In the recent earnings cycle they reported 66 cents compared to estimates for 63 cents. Revenue of $4.928 billion beat estimates for $4.891 billion. However, earnings declined -62% mostly because of the drop in demand from the oil and gas sector. Revenue declined -9$ for the same reason.
They guided for the current quarter to earnings of 85 cents. Full year revenue is expected to decline 2% to 5%. Full year earnings are expected to be $3.05-$3.25.
While they beat expectations, the performance was lackluster. With one of their major sectors in steep decline, it was remarkable that they beat earnings and raised guidance. When the oil and gas sector begins to rebound they are positioned for a huge bounce in earnings. The decline in oil and gas was priced into the stock at the January lows of $42. Shares rebounded with oil prices to $56 before earnings and dropped back to $52 with the weak market.
The CEO said Europe was better than it was just a few months ago and the rest of the world met expectations. The U.S. remained a trouble spot in certain segments.
The company is preparing to spin off its network power segment saw rising demand from data centers and telecom spending. He predicted the overall order book would turn positive in April/May and ramp up when capex spending returned to the energy sector.
Emerson is a solid company. They are not growing earnings significantly because of the energy sector but they are still tending to business. The spinoff of the network power division will provide a boost to the stock and allow Emerson to focus on the more profitable process management and power generation side of the business. The spinoff is expected to be completed by September 30th. The spin will provide cash to Emerson and allow them to put that cash to work in other areas and buyback stock. The CEO said, while they continue to proceed on the spinoff they are also talking to interested parties about an outright sale that would provide even more cash and flexibility. They are also in talks to sell the motors, drives and power generation business, which will further improve the company focus.
The company declared a quarterly dividend of 47.5 cents payable June 10th to holders on May 13th. They had operating free cash flows of $719 million for the quarter and expects to produce $3 billion in FCF for all of 2016.
The company is a steady performer with a lot of headline events coming over the next six months. These sales events will provide cash and improve profitability.
Shares declined from $56 to support at $52 after earnings and buyers were waiting. Options are inexpensive and the spin/sales events should power the stock higher.
Buy JAN $55 call, currently $2.70, no initial stop loss.