Dividend growth gem Emerson Electric (click ticker for report: ) reported strong third quarter results Tuesday morning. The industrial conglomerate reported 3% year-over-year revenue growth, to $6.5 billion, slightly shy of expectations. The firm earned $1.04, up 16% year-over-year and higher than the Street expected. Operating margins grew 180 basis points to 19.9% during its third quarter. Emerson tightened its fiscal year 2012 guidance range, as it now expects earnings of $3.35-$3.40 per share on reported sales growth of 1-2% (3-4% on a constant basis), leading to operating cash flow of $3.3 billion to $3.4 billion.
Emerson’s Process Management segment significantly outperformed the rest of the company thanks to a global energy investments backlog that was bolstered by the recent flooding in Thailand. Sales in the segment grew 19% (23% net of foreign exchange fluctuations) to $2.2 billion, and a 17% increase in orders helped the firm’s backlog remain high. As long as project activity in oil and gas remain elevated, which shouldn’t be a problem with oil companies flush in cash, we expect the segment to perform well.
Industrial Automation sales fell 1% to $1.38 billion, though sales were up 3% on a constant currency basis. European sales remained weak, falling 4%; however, the US manufacturing industry continues to expand, as sales grew 12%. The firm cited strength in power generating alternators, hermetic motors and ultrasonic welding, which speak to the underlying areas of strength in the US (autos, rail, aerospace).
Network Power sales fell 6% during the third quarter to $1.58 billion. The firm blamed weakness in telecom and information technology end markets, specifically in the US (down 14%) and Europe (down 7%) as the major drivers of weakness. However, we like the long-term prospects of the business as data and telecom usage will only go up, in our view.
Performance in the firm’s Climate Technologies segment remained weak, as commercial and residential construction continues to be challenged. Sales decreased 2% to $1.14 billion, though management cited strong growth (12%) from the US residential market. We aren’t crazy about this business in the next several quarters, as commercial development looks as though it will remain sluggish, even if economic growth accelerates (due to high supply available). This segment could continue to underperform over the near term.
Though performance varied across different segments, Emerson’s consolidated results were reasonably strong, growing at about the pace of GDP. Any unexpected upside in Europe and/or confidence growth in the United States could help propel sales in the company’s weaker segments, while a reacceleration in China could add unexpected incremental growth across the board. Regardless, with the firm’s 3.2% annual dividend yield, fantastic dividend growth potential and solid Valuentum Dividend Cusion score, we’re happy to be paid to wait for an economic turnaround. We hold the name in the portfolio of our Dividend Growth Newsletter.
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