Emerson Earnings: Discrete Market Weakness and Soft NI First-Year Sales Contributions Disappoint

Nothing materially alters our long-term thesis for wide-moat-rated Emerson EMR. After fully folding in National Instruments’ financials, we lift our fair value estimate to $109 from $105. While long-term contributions were a benefit, National Instruments’, or NI’s, implied year one contributions (expected sales down midsingle digits) disappointed our initial expectations. Furthermore, Emerson’s fiscal fourth-quarter revenue also somewhat disappointed us. NI’s weak near-term expectations, however, were fully offset by a better organic sales guide from core Emerson, our model’s additional year of revenue, and the time value of money.

Furthermore, even with Emerson’s weaker top line, its adjusted EBITA margins came in only marginally lower than what we penciled in (20 basis points lower). We’re fine with these results and aren’t overly concerned. Emerson has enjoyed some strong operating leverage over the past year (53% on an incremental EBITA margin basis, when excluding AspenTech). However, we wouldn’t be surprised to see some cyclical bumps ahead.

We were initially hoping to see $4.19 billion of revenue during the fiscal fourth quarter, so Emerson fell about $100 million in sales short of our expectations. This was entirely due to softness in Emerson’s discrete automation business. We’re not overly surprised by this since discrete’s end markets are shorter-cycled, and they tend to fall first in a weakening macroeconomic environment.

Rising rates affect companies’ capital investment plans, and we suspect there may be less associated maintenance, repair, and overhaul, or MRO, revenue in this business, which is why we model a lower midcycle operating margin in discrete relative to other parts of Emerson. We point out that MRO revenue is inherently higher-margin and tied to operating as opposed to capital spending.