Vendors’ figures give few hints of trouble ahead

Automation vendors have enjoyed an unprecedented period of growth in recent years, ensuring that even the weakest have been able to restructure and at least partially rebuild their balance sheets since the dark days of the turn of the millennium. Now, however, with even the most optimistic vendors acknowledging that their key markets cannot be totally immune from the effects of financial turmoil and looming global recession, analysts have been scanning the latest round of quarterly, half yearly and annual results, trying to identify which companies have the strength in depth to survive and even thrive in a downturn and which have inherent weaknesses that tougher times will expose.

Inevitably, given the speed with which financial and economic events have unfolded in recent months, even the most up-to-date quarterly figures can only give the earliest indication of what is to come. So there’s not much sign of tougher times ahead in Emerson’s quarterly and full-year figures for the period to September 30, 2008. Emerson as a whole had sales of $24.8 billion for the full year, an increase of 12% on the previous year, while sales growth in the fourth quarter was only 1% down on the average for the year as a whole. Earnings per share from continuing operations for the full year were up 17% and in the fourth quarter up 13%. Confirming John Berra’s prediction that it would grow by a full $1 billion in the year, Emerson Process Management increased sales in the full year by 17% to $6.7 billion with underlying sales growth after the effects of currency translation of 14%. Most significantly, it again raised its margin, this time by 90 basis points to 19.6%. In the fourth quarter, Emerson Process Management increased sales by 13.4% over the same period in 2007 to $1.89 billion and grew earnings by 22%.

It’s a similar story at ABB which, reporting for the first time under its new CEO Joe Hogan, revealed third-quarter revenues up 22% at $8.79 billion and earnings before interest and tax up 25% at $1.29 billion. ABB’s Process Automation division saw revenues grow 27% to $1.92 billion and EBIT jump 39% to $218 million, with earnings as a percentage of revenues up a point at 11.4%.

A rather less rosy picture emerges at Invensys where first half revenues grew just 1% in CER (Constant Exchange Rate) terms to £1.09 billion and operating profit before interest and tax was up 12% at £120 million. At Process Systems, revenue was up just 4% at £425 million and OPBIT down by an alarming 17% at £ 41 million. Operating margin was 9.6%, down from 12.1% in the same period last year and 14.1% for the whole of 2007/2008. Nor is there much sign of any improvement at Eurotherm, where revenue was up 3% at £61 million, OPBIT down 1% in CER terms at £4 million and the margin was down from 7.4 to 6.6%.

Sales & marketing

Faced with the glaring discrepancy between the IPS results and those in the relevant divisions of Emerson and ABB, shareholders and analysts may not be entirely convinced by the explanation that the modest growth in revenues is down to the nature and timing of order intake or that the fall in OPBIT can be explained by increased investment in sales and marketing and R&D. If last Summer’s rebranding exercise is an indication of where the investment in marketing has gone, then there seems little prospect of an early return on it, at least until next month’s long-planned international media tour has reduced the perception of internal and external confusion among commentators and customers.

Finally, among the latest clutch of quarterly reports, what of Rockwell? It had already warned that it would be taking a $50-million charge in the fourth quarter against the 3% cut back in staff announced two months ago, so the fall in operating earnings from $275.4 million in fourth quarter 2007 to $269.1 million this time on revenues up from $1.37 billion to $1.48 billion was not the surprise it might otherwise have been. In the full year, Rockwell grew sales 14% to $5.7 billion and saw income from continuing operations increase from $789 million to $809 million.

Perhaps the most surprising aspect of the current automation scene is that, while all vendors have seen dramatic falls in their share price in recent weeks, with the exception of Emerson, there is little discrimination between those who might be perceived as weaker or stronger. Thus while Emerson’s stock is down 45% from its 12-month high, Invensys, and Rockwell and ABB are all more than 60% off, with ABB currently the biggest faller at 68%.
Mind you, it does depend where you’re starting from. Invensys shareholders are pretty much back to where they were in late 2005!

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