Emerson Electric Co. EMR reported second-quarter fiscal 2018 adjusted earnings of 76 cents per share, beating the Zacks Consensus Estimate of 71 cents by 7%.

Favorable global market conditions and strong top-line growth boosted the company’s bottom line, which was offset by high cost of sales and administrative expenses.

Inside the Headlines

The company continued with its growth momentum in the fiscal second quarter as both the Automation Solutions and Commercial & Residential Solutions platforms delivered a rise in net sales. The metric grew 18.9% year over year to $4,248 million and surpassed the Zacks Consensus Estimate of $4,200 million.

Emerson Electric Co. Price, Consensus and EPS Surprise

Emerson Electric Co. Price, Consensus and EPS Surprise | Emerson Electric Co. Quote

While underlying sales growth for the quarter was 8%, acquisitions and divestitures contributed 8% to growth, and currency translation favorably impacted the top line by 3%. Persistent improving conditions in the energy related, chemical, life sciences and discrete markets drove sales.

In the fiscal second quarter, the company’s Automation Solutions platform reported an impressive 30.9% year-over-year growth in net sales to $2,771 million. Underlying sales was up 10% driven by strong MRO demand as well as small and mid-sized projects focused on expansion and optimization of existing facilities.

Underlying sales in North America recorded an increase of 16%, courtesy of energy related, chemical as well as life sciences markets. The metric was up 7% in Asia, while the same in China grew 20% on continued solid demand across process, hybrid as well as discrete markets. Also, underlying sales in Middle East/Africa were up an impressive 29%. However, the same in Europe and Latin America were down 1% and 10%, respectively.

Margins expanded 20 basis points (bps) year over year to 15.7%. Excluding the dilutive impact of the Valves & Controls acquisition, the same expanded 240 bps to 17.9% driven by leverage on higher sales and restructuring benefits.

Net Sales in the Commercial & Residential Solutions increased 1.6% to $1,483 million. Underlying sales for the segment recorded an increase of 4%. The same metric in North America rose 1% on account of solid demand for professional tools, which was partially offset by lower-than-expected demand for air conditioning.

Asia witnessed strong growth once again as the underlying sales rose 17% year over year backed by solid demand for refrigeration and air conditioning in China. Underlying sales in Europe was up 5%, courtesy of strong demand in air conditioning and construction related markets.

Under the platform, the Climate Technologies business grew 6.6% year over year to $1,128 million, while the Tools & Home Products unit declined 11.7% from the year-ago quarter to $355 million.

Margins contracted 10 bps to 23.6% compared with the prior-year quarter.

Other Developments

During the reported quarter, the company signed an agreement to acquire the Tools and Test Equipment business of Textron for approximately $810 million. Tools & Test, when combined with Emerson’s Ridge Tool Company, will enable Emerson to extend its markets and add major capabilities to meet needs of its customers.

Moreover, the company completed the acquisition of ProSys, a global supplier of software and services that facilitates increased production and safety for chemical, pulp & paper, oil & gas as well as refining industries. ProSys’ unique technologies and proficiency are expected to enable Emerson to aid customers in improving plant performance, safety and profitability by optimizing human as well as automation resources.

Also, the company completed the buyout of Cooper-Atkins, a leading technology company in foodservice markets. This buyout is anticipated to improve Emerson’s ability to cater to the needs of its cold chain customers, offering safe control of food as well as other temperature-sensitive products.

Liquidity & Cash Flow

Exiting the second quarter, the company had cash and cash equivalents of $2.4 billion and long-term debt of about $3.4 billion.

Guidance

In light of the strong global demand trends, Emerson raised its outlook for fiscal 2018. It now expects net sales for the year to grow about 13%, with underlying sales to be up about 7%. These figures compare favorably with the prior projections of an increase of 11-13% and underlying sales increase of 5-7%.

Our Take

Over the past few quarters, Emerson’s growth momentum is being driven by favorable trends in energy-related, hybrid and general industrial markets as well as strong demand in the HVAC and refrigeration markets.

Also, the company is well-positioned to benefit from global infrastructure growth. This is because its core businesses hold dominant positions in markets tied to energy efficiency and infrastructure spending.

However, of late, Emerson’s operations have suffered as a result of slow spending in general industrial markets. This, in turn, has affected the company’s order rates across the related segments.

Emerson carries a Zacks Rank #3 (Hold).

Stocks to Consider

A few better-ranked stocks in the same space include A. O. Smith Corporation AOS, Rexnord Corporation RXN and Eaton Corporation, PLC ETN. Each of these companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A. O. Smith has decent earnings surprise history, having surpassed estimates thrice in the trailing four quarters, with an average beat of 3.1%.

Rexnord has an impressive earnings surprise history, having outpaced estimates in the trailing four quarters, with an average beat of 12.6%.

Eaton exceeded estimates twice in the trailing four quarters, with an average beat of 3%.