Eaton Corporation plc / ( (ETN - NYSE) / $77.86*

Note: All new or revised material since the last report is highlighted.

Reason for Report: Non-Earnings Update

Prev. Ed: 4Q17 Earnings Update was done on Mar 22, 2018.

Brokers’ Recommendations: Neutral: 66.67% (10 firms); Positive: 33.33% (5); Negative: 0% (0) Prev. Ed: 12, 5, 0

Brokers’ Target Price: $91.44(­ 62 cents from the last edition; 9 firms) Brokers’ Avg. Expected Return: 17.44%

*Note: Though dated April 10, 2018, broker materials are as of April 3, 2018.

Portfolio Manager Executive Summary

Eaton Corp plc is a power management company and a leading diversified industrial manufacturer of fluid power systems, electrical control products, automotive systems, and medium and heavy-duty truck transmissions. Acquisitions, divestitures and organic growth added balance to the company’s portfolio.

Of the 15 firms following the stock, 10 provided neutral ratings, five assigned positive ratings and no firm rendered negative rating to the stock. Target price ranges from $82.00 (­ 5.3% upside from the current price) to $102.00 (­ 31% upside from the current price). The average price stands at $91.44 (­ 62 cents from the last edition and 17.44% upside from the current target price).

Neutral or equivalent outlook (10/15 firms or 66.67%): The neutral firms believe that Eaton will gain from restructuring and progression. Electric Systems & Services performed well on the back of a positive trend in the Americas. The company benefited from a slightly lower tax rate. Though, these firms predict volatility & restructuring, but they believe that positives like favorable positioning to a more pronounced global economic cycle, increased resilience to a slow macro and focus on global cost structure will improve Eaton’s performance.

Positive or equivalent outlook (5/15 firms or 33.33%): The firms are bullish on Eaton based on improved industrial end-market growth supplemented by positive momentum in the company’s longer-cycle electrical businesses. The firms believe that solid order rates at the end of the year will support growth across all end markets and regions. Also, continued rise in industrial production will drive higher earnings over the near term for Eaton. And since it has completed the multi-year restructuring program, the company’s organic growth will also increase.

April 10, 2018

Overview

The firms identified the following investment merits and drawbacks of the company:

Key Positive Arguments / Key Negative Arguments
Research & Development: The company has been investing consistently in R&D programs for the introduction new products, including power management solutions to reduce energy consumption and carbon emissions.
Well Balanced Portfolio: Following a series of acquisitions in mid-cycle Hydraulics markets along with prior acquisitions in Aerospace and Electrical, the portfolio is now better balanced between early- cycle, mid-cycle and late-cycle businesses.
Acquisitions and Restructuring: Synergies from the Cooper acquisition are on track and savings from restructuring will continue to benefit Eaton.
Dividend & Share Repurchases: The company continues to reward its shareholders since 1923 through its dividend program. The company also plans to buy back shares worth $3 billion and increase shareholder’s value. / Pricing and Input Costs: Maintaining pricing could be challenging in a weakening macroeconomic environment as costs of raw materials decline.
Global Market Headwinds: The overseas market has a considerable hold on Eaton’s Electrical business. Any negative change in the global economy could hamper the growth opportunities of the company.
Management execution. Management’s ability to execute growth strategies is crucial for company's sales and operational performance. Failure to meet operational results can affect the company’s share performance.

Dublin, Ireland based Eaton Corporation plc. is a global diversified industrial and technology leader in electrical components and systems for power quality, distribution and control; hydraulics components, systems and services for industrial and mobile equipment; aerospace fuel, hydraulic and pneumatic systems for commercial and military use; and truck and automotive drivetrain and powertrain systems for performance, fuel economy, mining, construction, agriculture, forestry, renewable energy and safety. Eaton has approximately 96,000 employees and sells products to customers across more than 175 countries. It operates through four business segments: Electrical, Hydraulics, Aerospace and Vehicle. The company’s fiscal year coincides with the calendar year. Further information on the company is available at: http://www.eaton.com.

Mar 22, 2017

Long-Term Growth

Eaton Corporation has gradually transformed itself from an automotive and truck component manufacturer to a diversified industrial enterprise with leading positions in its core (and relatively faster growing) Electrical, Hydraulic and Aerospace market segments. The company plans to expand its market position in the production of fluid power systems, electrical power control, automotive engine air management and power train controls, as well as drive train systems for trucks.

Eaton remains focused on cost take out (specially receiving a strong return on the company’s ongoing $440 million restructuring program) for more lean and efficient production and use the company’s scale advantages. Accordingly, the company plans to invest $440 million in restructuring program during the 2015-2018 periods. This is expected to create a cumulative benefit of $520 million.

In addition, the company has developed electrical and vehicle technologies that can materially reduce energy consumption, thereby lowering the carbon footprint of buildings as well as vehicles. Eaton is simultaneously working on upgrading existing systems to maintain its position in the global markets. Eaton’s focus on research & development activities is helping the company to develop new products and provide power solutions to its customers.

Eaton operates in a number of markets and faces a wide array of competitors in varied niches. In addition, Eaton’s strategic acquisitions allow it to foray into new markets and enhance its revenue stream.

Overall, the firms believe that long-term earnings will be aided by Eaton’s fuel-saving product offerings, restructuring initiatives and strong performance in all segments. The company expects 2018 to be a strong year and to deliver their commitments to shareholders that they have outlined as a part of 2016-2020 goals.

Mar 22, 2017

Target Price/Valuation

Rating Distribution
Positive / 33.33% ­
Neutral / 66.67% ­
Negative / 0%
Average Price Target / $91.44 ­
Maximum Target Price / $102.00
Minimum Target Price / $82.00
No. of Brokerage Firms with Target Price/Total / 9/15

The major obstacles to target price realization include an ongoing downturn in the global economy, volatility in the foreign exchange market and management execution risks. Weakness in the Asia-Pacific market, NAFTA Truck, global non-residential construction, and auto and aerospace businesses might pose challenges.

Recent Events

On Mar 27, 2018, Eaton unveiled a new gas-insulated switchgear designed to provide powerful advantages in safety and reliability for critical power applications in data centers, oil and gas, mining, process industries and other commercial and industrial applications.

On Feb 28, 2018, Eaton’s Board of Directors approved a 10% hike in the quarterly dividend rate. The new quarterly dividend will be 66 cents per share.

On Feb 1, 2018, Eaton posted fourth-quarter earnings per share of $1.29, which lagged the Zacks Consensus Estimate of $1.25 by 3.2%. Total revenues were $5,213 million, surpassing the Zacks Consensus Estimate of $5,090 million by 2.4%.

Revenue

In the quarter, Eaton’s total revenues were $5,213 million, surpassing the Zacks Consensus Estimate of $5,090 million by 2.4%. The figure was 7.1% higher than the year-ago quarter.

The year-over-year sales increase includes 5% growth in organic sales and 2% rise in positive currency translations, which was better than the expected growth of 3-4% from organic sales and 1.5% from positive currency translations.

Segment revenue as per the company press release:

Electrical Products: Total sales were $1,822 million, up 6% from the year-ago quarter. Organic sales were up 3% and currency translation was a positive 3%.

Electrical Systems & Services: Total sales were $1,498 million, up 3% from the year-ago quarter. Organic sales were up 2% and currency translation was a positive 2%.

Hydraulics: Total sales were $614 million, up 18% from the year-ago quarter. Organic sales were up 17% and currency translation was a positive 1%.

Aerospace: Total sales were $441 million, up 4% from the year-ago quarter. Organic sales were up 2% and currency translation was a positive 2%.

Vehicle: Total sales were $838 million up 13% from the year-ago quarter. Organic sales were up 12% and currency translation was a positive 3%.

Guidance

Eaton expects organic revenues to increase 4% in 2018. Segment wise, expected revenues are 3%,4%,10%,3%,1% for Electrical Products, Electrical Systems & Services, Hydraulics, Aerospace and Vehicle, respectively.

Outlook

According to the bullish firms, total revenues are expected to increase in the range of 4.15-4.6% in 2018.

Margins

Cost of products sold in the reported quarter was $3,535 million, up 27.4% from the prior-year quarter.

Selling and administrative expenses were $862 million, in line with the year-ago quarter’s level. In the fourth quarter, the company’s research and development expenses were $144 million, down from $145 million in the prior-year quarter.

Interest expenses of $65 million were up 8.3% from the prior-year quarter.

Segment Details

Electrical Products: Operating income for the quarter was $331 million, up 4% year over year.

Electrical Systems & Services: Operating income for the quarter was $225 million, up 27% year over year.

Hydraulics: Operating income for the quarter was $74 million, up 100% year over year.

Aerospace: Operating income for the quarter was $88 million, up 5% year over year.

Vehicle: Operating income for the quarter was $140 million, up 44% year over year.

Guidance

For 2018, the company expects consolidated operating margin in the range of 16.3-19.6%.

Electrical Products operating margins are expected in the range of 18.7-19.3% in 2018. Electrical Systems and Services segment operating margin are expected in the range of 13.8-14.4%. Operating margins of Hydraulics segment are expected in the rage of 14.2-14.8%. Aerospace segment’s operating margins are expected in the rage of 19.0-19.6%. Vehicle segment’s operating margins are expected in the range of 15.8-16.4%.

As previously announced, the company projects an investment of $90 million in restructuring expenses in 2018.

Earnings per Share

Earnings per share of $1.29 in fourth-quarter 2017 topped the Zacks Consensus Estimate of $1.25 by 3.2%. Reported earnings were at the high end of management’s guidance of $1.19-$1.29. Also, earnings were 15% higher than the year-ago figure.Adjusted earnings in the quarter, including the new one-time gain of 14 cents from the new U.S. tax law, were $1.43 per share.

Guidance

First-quarter 2018 earnings per share are expected between $1.00 and $1.10. The company expects its 2018 earnings in the range of $5.00-$5.20 per share.

Outlook

The bullish firms have raised their earnings per share estimates for 2018 and 2019 on basis of lower tax rate. According to the bullish firms total earnings is expected to increase in the range of 9.9-11.7% in 2018.

Research Analyst / Raj Karnani
Copy Editor / Proma Bhattacherjee
Content Ed. / Jewel Saha
Lead Analyst / Jewel Saha
QCA / Jewel Saha
No. of brokers reported/Total brokers / 1/15
Reason for Update / Non-Earning Update

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