Dividend stalwart Emerson Electric (click ticker for report: ) updated investors on order flow during the summer months. Order growth across all segments except Process Management was pretty weak, resulting in the firm to forecast 2.5% revenue growth for its fiscal year. Looking at the results, it appears order growth slowed towards the end of the quarter, with Industrial Automation and Network Power looking particularly weak.
Emerson didn’t give a very optimistic forecast, admitting that demand will be sluggish and inconsistent until there are some positive economic catalysts. Not surprisingly, the firm called for clarity and improved visibility on the investment landscape, which we think was a not-so-subtle jab at the impending fiscal cliff. During third-quarter reporting season, we expect to see several firms, especially those with capital-intensive projects, to express frustration with the current political situation. We think some clarity with respect to the tax code and government spending going forward will provide a nice upside catalyst for industrial investment. Still, we found it odd the firm didn’t ever point to U.S. demand as particularly weak.
Process Management strength was driven primarily by oil and gas investment, power end markets, and chemicals. With oil prices relatively strong, we think refiners that are generating lots of cash will continue to invest in efficiency processes. Commercial & Residential Solutions slowed near the end of the quarter, but were fairly strong overall. From the company’s comments and recent homebuilder results, we think residential construction in the U.S. remains fairly robust.
Confirming what we’ve heard from several other firms, Emerson identified weakness in Asia as one of the major headwinds. Telecommunications and information end markets appear to be particularly weak, and the company noted that economic conditions in Australia, India, and China “deteriorated.” Climate Technologies were also weak in Asia, as well as Europe, suggesting that commercial construction remains challenged.
Though we’re never happy to see companies dealing with sluggish economic conditions, we continue to think Emerson is well positioned to benefit from a return to growth. The firm’s balance sheet remains strong, and we think the company will have plenty of room to raise its safe dividend. We like shares at current levels and hold the name in the portfolio of our Dividend Growth Newsletter.
Please click the following link for our Dividend Report on Emerson Electric: