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Emerson Electric (EMR) delivered a strong Q3 FY2025 beat, driven by margin expansion, robust order growth, and disciplined execution, positioning the company for continued earnings momentum despite macro risks.

# Emerson Electric Co. Delivers Robust Q3 FY2025 Beat: Margin Expansion and Order Momentum Drive Outperformance

---

## Executive Summary

- **Emerson Electric Co. (EMR) delivered a strong Q3 FY2025**, with revenue of **$4,553M (+4% YoY)** and GAAP EPS of **$1.03 (+72% YoY)**, both exceeding consensus expectations. The outperformance was driven by **broad-based order momentum**—notably a **+16% YoY increase in Test & Measurement orders**—and disciplined execution on pricing and cost optimization.
- **Earnings quality was high**, with GAAP operating income rising to **$734M** and operating margin expanding by **570 bps YoY to 16.1%**. Improved working capital efficiency and lower restructuring costs contributed to the margin gains, while SG&A and tariff impacts were well managed.
- **Management’s tone was bullish**, highlighting robust order growth in LNG, power, and life sciences, as well as successful integration of AspenTech and new AI-enabled product launches. However, they maintained a **cautious stance** on macro risks, including tariffs, FX volatility, and geopolitical tensions.
- **Guidance for Q4 FY2025** calls for **5–6% underlying sales growth** and adjusted EPS of **$1.58–$1.62**, with full-year adjusted EPS of **~$6.00** and free cash flow of **~$3.2B**. This is broadly in line with or slightly above Street expectations, reflecting confidence in continued operational momentum.
- **Key risks** include ongoing macro and geopolitical uncertainties, but the market may be **underappreciating Emerson’s operational improvements** and order growth signals. Near-term catalysts include further AI-enabled product rollouts and continued order strength in Test & Measurement.

---

## Performance Snapshot

| Metric                | Reported   | Consensus | Surprise | YoY Change |
|-----------------------|------------|-----------|----------|------------|
| Revenue               | $4,553M    | $4,480M   | +$73M    | +4%        |
| GAAP EPS              | $1.03      | $0.92     | +$0.11   | +72%       |
| GAAP Operating Income | $734M      | —         | —        | +570 bps OM|
| Test & Measurement Orders | +16% YoY | —         | —        | +16%       |

---

## Earnings Quality

- **Revenue mix** was healthy, with broad-based growth and particular strength in Test & Measurement, LNG, and life sciences.
- **Margin strength** was a standout, as GAAP operating margin expanded to **16.1% (+570 bps YoY)**, driven by improved working capital efficiency (reduced from $176M to $80M), lower restructuring costs, and stable SG&A.
- **Cost structure** improvements were evident, with tariff impacts and FX headwinds mitigated more effectively than anticipated. There was no reliance on one-off items, underscoring the sustainability of the margin gains.

---

## Management Commentary & Guidance

- **Management’s tone was confident**, emphasizing strong execution, margin resilience, and robust order growth. They highlighted the successful integration of AspenTech and the launch of new AI-enabled products as key growth drivers.
- **Guidance for Q4 FY2025**: Underlying sales growth of **5–6%**, adjusted EPS of **$1.58–$1.62**, and full-year adjusted EPS of **~$6.00** with free cash flow of **~$3.2B**. Assumptions are realistic, balancing optimism from strong Q3 performance with caution on external risks.

---

## Key Risks

- **Cost inflation and margin pressures** remain a risk, particularly from global supply chain disruptions and input costs.
- **Regulatory and demand-side risks** include ongoing tariff impacts, FX volatility, and geopolitical tensions, especially in Europe and China.

---

## Expected Market Reaction

- The **positive headline beats** and **margin expansion** are likely to drive a favorable market reaction, with investors rewarding the strong order growth and operational discipline.
- However, the **cautious management tone** on macro risks may temper enthusiasm, leading to a measured rather than euphoric response.

---

## Final Takeaway

- **Q3 FY2025 was a strong quarter for Emerson Electric Co.**, marked by high-quality earnings, robust order momentum, and significant margin improvement.
- The market may be **underpricing Emerson’s operational improvements** and the sustainability of order growth, while **overemphasizing macro risks** that have been better managed than expected.
- **Upcoming catalysts** include further AI-enabled product launches and continued strength in Test & Measurement orders, as well as progress on AspenTech integration and digital recurring revenue streams.

Emerson Electric Co. is well-positioned for continued outperformance, with a clear pathway to sustained earnings growth despite external uncertainties.

Emerson (EMR): Margin Expansion and Order Strength Propel Beat

Emerson Electric (EMR) is set for Q3 FY2025 growth, driven by strong software momentum and margin expansion, but faces macro risks from China and a flat Intelligent Devices segment.

# Emerson Electric Co. (EMR): Margin Resilience and Software Momentum Set the Stage for Q3 FY2025, but Macro Risks Linger

## Executive Summary

We maintain a **Bullish** outlook for Emerson Electric Co. (EMR) heading into Q3 FY2025, underpinned by robust order growth, continued margin expansion, and strong execution in the Software and Control segment. **Q2 revenue of $4.43B** and a **53.5% gross margin** set a high base, with management guiding for **Q3 underlying sales growth of 3.5–4.5%** and **adjusted EPS of $1.48–$1.52**. The market may be underestimating the positive impact of the AspenTech integration, which is driving a **7–10% YoY sales increase** and a **560–620 bps margin boost** in Software and Control. However, risks remain around China exposure and a flattening Intelligent Devices segment, which could temper upside if macro headwinds intensify.

## Recent Trends Signal What’s Next

Recent quarters have demonstrated consistent top-line growth and margin improvement, with the Software and Control segment emerging as a key driver. **Q2 FY2025 revenue reached $4.43B** (up 4% YoY), while **gross margin expanded to 53.5%** and **adjusted segment EBITA margin hit 28%**. EPS has steadily climbed, with **Q2 adjusted EPS at $1.48**. The following table summarizes the last four quarters, highlighting the positive trajectory:

### Quarterly Financial Trends

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Adjusted EPS ($) |
|--------------|--------------|------------------|----------------------|------------------|
| Q3 FY2024    | 4.21         | 51.8             | 25.2                 | 1.32             |
| Q4 FY2024    | 4.35         | 52.4             | 26.1                 | 1.39             |
| Q1 FY2025    | 4.38         | 53.0             | 27.0                 | 1.44             |
| Q2 FY2025    | 4.43         | 53.5             | 28.0                 | 1.48             |

This trend suggests further incremental improvement in Q3, especially as the order book and backlog remain robust.

## Management’s Forward Tone and Positioning

Management’s Q2 commentary marked a notable shift from caution to confidence. CEO Lal Karsanbhai stated, **“We delivered record margin performance and are confident in our plans for the second half.”** This contrasts with prior quarters’ references to “uncertainty” and “macro headwinds.” The Q3 guidance—**adjusted EPS of $1.48–$1.52** and **segment EBITDA margin near 27%**—reflects a focus on operational discipline and cost control. The tone signals management’s belief in the durability of recent gains, even as they acknowledge “watch areas” in China and discrete automation.

## KPI Trends & Upcoming Quarter Drivers

The most relevant KPIs for Q3 are order growth, backlog, and working capital efficiency:

### Key KPI Movements

| KPI                        | Q2 FY2024 | Q1 FY2025 | Q2 FY2025 | YoY Change | QoQ Change |
|----------------------------|-----------|-----------|-----------|------------|------------|
| Underlying Orders Growth   | +2%       | +3%       | +4%       | +2 pts     | +1 pt      |
| Project Backlog ($B)       | 10.7      | 11.1      | 11.4      | +0.7       | +0.3       |
| Working Capital Change ($M)| -120      | -180      | -203      | -83        | -23        |

- **Order Growth:** The acceleration to **+4% YoY** in Q2, excluding AspenTech, supports near-term revenue visibility.
- **Backlog:** The **$11.4B backlog** provides a revenue cushion for Q3 and beyond.
- **Working Capital:** A **$203M reduction** over six months signals improved cash generation and margin support.

These KPIs collectively point to sustained revenue growth and margin stability in Q3.

## Missed by the Street

A subtle but important risk is embedded in management’s brief reference to “watch areas” in China and discrete automation. While headline guidance is strong, this caution suggests that **margin expansion could stall** if these markets deteriorate. Additionally, the **flat performance in Intelligent Devices** is not fully reflected in consensus models, potentially leading to downside surprises if recovery lags.

## Scenarios for the Upcoming Quarter

### Q3 FY2025 Scenario Table

| Scenario | Revenue Change | Adjusted EPS | Operating Margin (%) | Key Assumptions                                              |
|----------|----------------|--------------|----------------------|--------------------------------------------------------------|
| Bull     | +5–6%          | ~$1.55       | 28.5                 | Accelerated Software growth, favorable FX, robust order uptick|
| Base     | +3.5–4.5%      | $1.48–$1.52  | 27.0                 | Steady AspenTech integration, stable macro trends            |
| Bear     | +2–3%          | ~$1.45       | 26.0                 | Extended China headwinds, product cycle delays               |

**Base case** is most likely, given current order trends, backlog strength, and management’s disciplined execution. Upside is possible if Software and Control outperforms, but macro/geopolitical risks cap the bull case.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Adjusted EPS ($) |
|--------------|--------------|------------------|----------------------|------------------|
| Q3 FY2024    | 4.21         | 51.8             | 25.2                 | 1.32             |
| Q4 FY2024    | 4.35         | 52.4             | 26.1                 | 1.39             |
| Q1 FY2025    | 4.38         | 53.0             | 27.0                 | 1.44             |
| Q2 FY2025    | 4.43         | 53.5             | 28.0                 | 1.48             |

### KPI Movement Table

| KPI                        | Q2 FY2024 | Q1 FY2025 | Q2 FY2025 | YoY Change | QoQ Change |
|----------------------------|-----------|-----------|-----------|------------|------------|
| Underlying Orders Growth   | +2%       | +3%       | +4%       | +2 pts     | +1 pt      |
| Project Backlog ($B)       | 10.7      | 11.1      | 11.4      | +0.7       | +0.3       |
| Working Capital Change ($M)| -120      | -180      | -203      | -83        | -23        |

### Key Management Quotes

1. **“We delivered record margin performance and are confident in our plans for the second half.”**  
   – Q2 FY2025 Earnings Call  
   *Signals management’s optimism and focus on execution.*

2. **“We continue to see robust demand in our Software and Control segment, with AspenTech integration ahead of schedule.”**  
   – Q2 FY2025 Earnings Call  
   *Highlights the key growth driver for Q3.*

3. **“We are closely watching developments in China and discrete automation markets.”**  
   – Q2 FY2025 Earnings Call  
   *Indicates potential risk areas that could impact margins.*

4. **“Our project backlog now exceeds $11 billion, providing strong revenue visibility.”**  
   – Q2 FY2025 Earnings Call  
   *Supports the positive revenue outlook for Q3.*

5. **“Operating working capital improved by over $200 million in the first half.”**  
   – Q2 FY2025 Earnings Call  
   *Points to enhanced cash flow and margin support.*

6. **“We expect adjusted EPS in the range of $1.48 to $1.52 for Q3.”**  
   – Q2 FY2025 Earnings Call  
   *Sets clear expectations for the upcoming quarter.*

7. **“Intelligent Devices remains flat, but we anticipate gradual recovery in the second half.”**  
   – Q2 FY2025 Earnings Call  
   *Acknowledges a segmental drag and the need for monitoring.*

---

**In summary:** Emerson Electric enters Q3 FY2025 with strong momentum in software, expanding margins, and a healthy order book. While the outlook is bullish, investors should remain alert to macro and segment-specific risks that could temper upside.

EMR: Software Strength Drives Q3 Margin Upside