U.S. industrial conglomerate Emerson Electric Co. warned Wednesday that U.S. and European economies have "clearly slowed" in the past two months and said order growth moderated, sending its shares down 6.7 percent to their lowest level since September.
Consumer and discretionary spending remain weak and industrial markets are slowing, Emerson said, citing Europe's debt crisis and the U.S. budget impasse that is threatening a potential debt default as soon as next week.
Shares of Emerson fell $3.38 to $50.67 in late morning trade. Other industrial shares were lower across the board. Rival Rockwell Automation fell 3.1 percent ahead of its earnings report due Thursday.
Large European industrials were also down after the news. Shares of Germany's Siemens AG were down 3 percent, those of Switzerland's ABB Ltd were down 3 percent and France's Schneider Electric was off 4 percent.
"We have seen a definite weakening of general business activity in June and July," Emerson management said in a regulatory filing. "U.S. and European economies have clearly slowed and entered a soft-patch and it remains unclear if they will improve much in the second half of the calendar year."
Emerson reported total orders up 10 percent to 15 percent in the three months to June, down from the 15 percent pace in the three months to May. A boost from the weak U.S. dollar contributed about 7 percentage points to the growth.
Emerson's warning was the most strongly-worded commentary on a second-half slowdown from any U.S. industrial company so far this earnings season.
Emerson's Chief Executive Dave Farr, widely respected among industrial analysts and investors for his often blunt, no-nonsense opinions, earlier this year warned that inflation was not going away and could stay high for two or three years.
Emerson said on Wednesday its industrial-related businesses are still strong, but added:
"We expect them eventually to soften due to the generally poor economic environment (the negative budget discourse in Washington D.C. and ongoing European debt crisis) and weakening trends," Emerson said in its monthly filing with the U.S. Securities and Exchange Commission.
Its orders showed slower growth in its industrial automation and network power segments, though orders remained high in its process management segment that serves energy and other process industries.
A weak U.S. housing market hurt Emerson's climate technologies market, where orders were flat to down 5 percent.
BULLS AT RISK
Several analysts said next year's profit forecasts for Emerson will come down.
A slowdown in the climate unit was expected, given weak demand from makers of air conditioners, said Nomura analyst Shannon O'Callaghan, but now growth rates in the process and industrial automation businesses are also moderating. He said Emerson's macro economic comments were the most blunt he had seen in recent weeks.
"Emerson's management team has their finger on the pulse of the global economy pretty well," O'Callaghan said. "Their upfront statement is sending a message about a broader slowdown."
O'Callaghan estimates Emerson's 2012 earnings at $3.75 per share. Some Wall Street analysts forecast earnings as high as $4 next year.
"This is a report that will put risk into consensus and especially the bullish estimates," he said. "It sets the stage for an interesting conference call from the CEO, Dave Farr."
Emerson shares, which typically trade at a premium to its peers, are down about 18 percent from their February 52-week high but had rebounded in recent weeks in anticipation of a strong profit report next Tuesday.
U.S. industrial shares have lagged the wider S&P 500 index this month and year-to-date, according to Standard & Poor's. In 2010, only the consumer discretionary sector posted bigger gains than manufacturing stocks.
S&P analysts recommend the sector, saying the global economy is gradually improving and industrial stocks are increasingly exposed to robust emerging markets and benefiting from the deep cost cuts made during the 2008-2009 downturn.
Several multinational manufacturers report monthly sales or orders data, including Caterpillar, Illinois Tool Works and tool maker Kennametal, offering a glimpse into future revenues and the direction of economic cycles.
Emerson's orders bottomed as the U.S. recession ended in mid-2009. They peaked in late 2010 and have been trending lower so far this year.
St. Louis-based Emerson is scheduled to report quarterly results next Tuesday. Analysts expect it to earn 91 cents a share, up from 78 cents a year ago, and forecast a 13-percent rise in sales to $6.4 billion.
Confirmation of a U.S. industrial slowdown came in Wednesday's durable goods report, which came in well short of economists' forecasts. New orders for long-lasting manufactured goods fell unexpectedly in June, weighed down by weak receipts for transportation equipment.
Wednesday's warning presents an opportunity for investors to buy a high-quality stock, said Catherine Maniscalco Avery, President and CEO of CAIM LLC, which owns Emerson stock.
Emerson "did a phenomenal job in the whole financial crisis," she said. It has raised dividends for 53 years in a row, generates strong cash flow, and has low debt.
"They're managing expectations, which is what we want."
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