Fourth quarter and fiscal 2026 earnings call, November 4, 2026

Emerson Electric closed fiscal 2026 with a quarter that beat expectations in every business group, and it paired that with a fiscal 2027 outlook that looks deliberately cautious against the order data. Underlying orders rose 14% in the fourth quarter, backlog ended at $8.2 billion (up 11%), and the project funnel grew to $13 billion (up 17%). Management nonetheless guided FY2027 underlying sales growth to about 5%, with the first quarter at the same 5%. Adjusted EPS is guided to $7.25, up 10% from $6.59, on an adjusted segment EBITDA margin of 29%. Several analysts, including Scott Davis of Melius and Amit Mehrotra of UBS, pressed on whether the guide had cushion. CEO Lal Karsanbhai did not dispute it, saying "it's not all roses out there" and pointing to Europe and China as the source of the conservatism.

The Order Book Is Lengthening, and Power Is Running Hot

The most important change in the quality of the business is the shift toward long-cycle work. CFO Mike Baughman said the share of backlog expected to convert within 12 months, which had been "pretty sticky at 75% for a long time," has dropped to 70%. He described the order book as "filling up with long cycle." That is good for visibility into 2028 and carries a cost for near-term conversion. It partly explains why 14% order growth is not translating into a faster FY2027 sales ramp. Projects were 37% of fourth quarter sales, and MRO, still healthy at 63%, exited the year at high single-digit growth.

Power is the standout. COO Ram Krishnan said the roughly $2.5 billion power business grew 25% in the quarter, and the control systems portion, which is driven mainly by greenfield projects, rose close to 45%. He said that "we are seeing strong momentum and no slowdown in power, and we expect to repeat that going into next year." Ovation orders rose 26%. Power began with fleet modernizations and has become broad-based, with greenfield work now a significant driver. LNG sales rose 68% in the quarter on project deliveries. Emerson now sees 275 million tonnes per annum of LNG capacity still to be awarded, after roughly 100 million tonnes per annum were awarded in 2026 against the 315 million tonnes per annum pipeline it cited a year ago. Management said demand for gas keeps replenishing that pipeline. The company also won the LNG Canada Phase 2 expansion, which doubles capacity from 14 million to 28 million tonnes per annum.

Growth verticals, which include power, LNG, life sciences, semiconductor and aerospace and defense, grew 21% in fiscal 2026 and now make up 27% of sales. Emerson guides them to low double-digit growth in 2027. Krishnan said power and LNG will sit at the high end of that range, life sciences at high single digits and semiconductor at mid-single digits. The semiconductor assumption is a strong first half followed by a slowdown, and he called that "the wildcard," since continued strength would let Emerson outperform.

Software & Systems Drives the Margin Story

Software & Systems grew 14% underlying, with Test & Measurement up 15% and Control Systems & Software up 14%. Segment margin expanded 490 basis points to 32.3%. Control Systems & Software was the main source of upside, with a margin of 33.1% against 27% a year earlier. Baughman attributed this to "a confluence of a lot of goodness," including favorable project closeouts, strong Ovation and software mix, and 5 points of price in the segment as memory-cost pricing came through. A small pricing leakage in the third quarter reversed in the fourth. Some of that upside was one-time in nature, since project closeouts can go either way, so the 33.1% should not be read as a run rate.

Annual contract value grew 10.1% to $1.7 billion, and Emerson guides to roughly 10% in 2027. Baughman said the software contract renewal dynamic cost 70 basis points of margin in fiscal 2026. Roughly half of that unwinds in 2027, and slightly more than half is recovered, which implies a tailwind of about 35 basis points. The remainder comes back in 2028. The company said it completed the AspenTech integration two years ahead of schedule, with $100 million of synergies realized.

Test & Measurement orders rose 14%, with semiconductor orders up 59%. Krishnan guides to high single-digit sales growth, with a strong first half and a moderating second half on tougher comparisons and caution on the semiconductor cycle. Automotive, now under $200 million of the portfolio, is the only slow segment. Margins ended the year at 29% against a target of 31% within five years, and Baughman expects more than 1 point of improvement in 2027. Management said the NI AI assistant embedded in the top tier of LabVIEW is driving a visible migration of purchases toward that tier, though it offered no retention data.

Europe and China Remain the Drag

Management was direct that neither region is expected to inflect. Europe was down 1% in fiscal 2026 and is modeled at low single-digit growth, with Germany, France and Italy still soft. China orders were negative again. Krishnan explained why a recovery is hard: "40% of our sales in China is exposed to petrochemical and refining. And that segment has to receive new capital formation in a meaningful way, and it is overcapacitized." Emerson does see pockets of strength. Test & Measurement grew 31% in China, but that is only about $200 million of the roughly $1.8 billion China business. Power, marine and export-oriented activity are also positive. Easier comparisons should deliver some growth in 2027, but Krishnan said China cannot return to historic levels without greenfield investment in chemicals and refining.

The weakness weighs most on Intelligent Devices, which grew 4% in the quarter and is guided to 4% for 2027. Krishnan put the long-term model at 3% to 6% and said a return to high single digits would require Europe and China to turn "in a meaningful way," which Emerson does not see. Intelligent Devices margin of 28.4% fell 10 basis points on mix, and first-half start-up costs for a capacity expansion will weigh on that segment in 2027.

Middle East: Strong Demand, With a War Caveat

Middle East orders rose 42% and sales in the Middle East and Africa rose 19%. Fiscal 2026 absorbed an approximately $85 million headwind from the conflict, though the fourth quarter impact was smaller than feared. Emerson won what Karsanbhai called the largest downstream petrochemical expansion in the region "in many decades," an ethylene cracker complex in Qatar, which he said showed customers have confidence to finance projects despite the war. Krishnan sized the remaining rebuild opportunity at $50 million to $75 million for 2027, out of the roughly $100 million identified earlier. The guide assumes high single-digit growth in the region again, explicitly "assuming the conflict does not escalate."

Margins, Pricing and a Messy Corporate Line

The FY2027 margin guide of 29%, up 80 basis points, implies incrementals of about 40% at the midpoint. The first quarter is guided to 28% and EPS of $1.58 to $1.62, which Baughman acknowledged is a slower start, consistent with last year's seasonal pacing. The plan assumes 2% price, a normalized level, after about 3% in fiscal 2026, of which 1 point came from tariffs. Krishnan flagged electronics and memory inflation as a headwind and said price/cost should remain positive.

The corporate line was a weak spot. Corporate costs came in about $45 million above expectations in the fourth quarter. Baughman attributed this to several small items: an expected asset gain that failed to materialize, an impairment, FX, and a "really bad" medical claims quarter. These cost about $0.05 per share, offset by lower interest, a lower share count and tax benefits. Fiscal 2026 corporate expense was $209 million, and the 2027 assumption is $195 million, which includes roughly $25 million of incremental investment in digital enablement for commercial tools, HR systems and AI readiness.

Capital Allocation: Buybacks Front-Loaded, Large M&A Off the Table

Emerson plans to return $3.8 billion in 2027, made up of $2.5 billion of repurchases and $1.3 billion of dividends, with the dividend per share raised 7% by $0.16 for a 71st consecutive annual increase. Free cash flow is guided to $3.8 billion to $3.9 billion, after $3.5 billion in fiscal 2026. Roughly $1.5 billion of the buyback is planned for the first quarter alone. Baughman gave two reasons: the lower share count supports the 2027 EPS guide, and it preserves flexibility for a bolt-on deal later in the year. He also acknowledged a valuation call, saying the company saw an opportunity that "has certainly borne out over the course of the last couple of months." If no acquisition materializes, the remaining $1 billion will be repurchased over the final nine months.

Karsanbhaiconfirmed that large-scale M&A is "not in the cards" in this plan and that the focus is on sub-$1 billion bolt-ons. Management said the election results do not change its view, citing supportive US industrial, energy and nearshoring policy.