Note: This report contains substantially new material. Subsequent reports will have new or revised material highlighted.
Reason for Report:2Q12 Earnings Update
Prev. Ed.: June 26, 2012; 1Q12 Earnings Update (broker material considered till May2)
Brokers’ Recommendations: Positive: 16.67% (2 firms); Neutral: 83.33% (12); Negative: 0% (0)Prev. Ed.: 10; 4; 0
Brokers’ Target Price:$73.50 (↑ $3.06 from the last edition; 14 firms) Brokers’ Avg. Expected Return: (2.63)%
*Note: Although dated October 12, 2012, share price and brokers’ material are as of September 14, 2012.
Note: The tables below (Revenue, Margins, and Earnings per Share) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.
Portfolio Manager Executive Summary
Cooper Industries Ltd. (CBE or the Company) is a worldwide manufacturer of electrical products, tools and hardware. The Company operates through two segments: Energy & Safety Solutions and Electrical Products Group.
Of the twelve firms in the Digest Group covering the stock;twofirms assigned positive ratings andtenfirms provided neutral ratings. None of the firms were negative on the stock. The price targets range from $72.00 to $76.00, with an average at $73.50.
Neutral or equivalent outlook – Ten firms or 83.33%: The firms are impressed with Cooper’s performance in the quarter and consider the Company’s outlook to be solid. However, the firms believe that the stock is fairly valued at the current level and hence adopt a neutral stance. They are also concerned about the weak demand in construction and residential markets. After the recent announcement of CBE’s acquisition by Eaton Corporation (ETN), the firms are cautious as risk/reward is no longer favorable.The Company’s core growth was not very strong in the quarter with decreasing book-to-bill in June 2012and was unable to effectively reinvest cash. Cooper’s reliance on acquisitions for growth is risky compared to organic growth.
Positive or equivalent outlook – Two firms or 16.67%:The firms are confident that CBE’s exceptional operational execution capabilities and its investments in new products and initiatives should enable it to generate future growth opportunities and margin expansion going forward. Heavy demands in industrial/MRO markets as well as phenomenal investment trends in utility markets place the Company well to outperform in the future. Further, the Company’s substantial exposure to North America and material leverage to a recovery in non-residential construction in the coming yearsinduce a positive outlook on the stock. Good exposure to international markets also seems to be beneficial.
October 12, 2012
Overview
Incorporated in Ireland, headquartered in Houston, Texas, Cooper Industries Ltd. is a diversified manufacturer, marketer, and distributor of electrical products, tools, and hardware. General industrial manufacturers, such as those in the aerospace and automobile industries, are the main users of Cooper’s power tools and assembly systems. Itsbrands include Buss, Edison, Crouse Hinds, Weller, DGD, Buckeye, Cooper, and Master Power. Stanley Works and Danaher are the main competitors in the hand tools business, and Ingersoll Rand is a major competitor in the power tools business. The Company has manufacturing facilities in 21 countries. The Company sells its products through distributors, wholesalers, and agents, as well as directly to original equipment manufacturers, home centers, specialty stores, department stores, mass merchandisers, and hardware outlets.
The Company previously operated through two segments: Electrical Products and Tools. In conjunction with the joint venture of the Tools business with Apex Tool Group, LLC, CBE reclassified its reporting segments in 1Q10. The Electrical Products segment has been divided into two segments - Energy & Safety Solutions and Electrical Products Group. The Energy & Safety Solutions segment includes business unit results from the Cooper Crouse-Hinds, Cooper Power Systems, and Cooper Safety Divisions. The Electrical Products Group includes business unit results for the Cooper B-Line, Cooper Bussmann, Cooper Lighting, and Cooper Wiring Devices Divisions. With the completion of Apex Tools JV in July 2010, CBE deconsolidated the Tools group beginning in 3Q10.
The analysts identified the following key investment merits and drawbacks of CBE:
Key Positive Arguments / Key Negative Arguments- Cooper Industries’ financial flexibility will help grow revenue and expand margins.
- Cooper Industries’ creates incremental value for its customers by investing to develop and deliver innovative and unique products.
- Strong growth in developing international markets will be favorable for CBE.
- Demand is sturdy on a global basis, with steadfast investment in energy, aerospace, and infrastructure.
- Cooper Industries possesses an efficient and forward looking management team.
- During 2Q12, the Companyachieved earnings of $1.17 per share.
- The construction business, comprising 40% of Cooper’s portfolio, continues to be affected by recessionary pressure. Demand in both non-residential and residential construction markets remained weak in the reported quarter.
- Any prolonged downturn in the US, European, and Latin American economies will hamper CBE’s growth prospects.
- Heightened global competition, given that CBE expands its international exposure, can act as a negative catalyst for the Company.
- Any significant change in monetary or fiscal policies can result in currency fluctuations and can adversely affect the Company’s net sales and margins.
The Company’s website is
Note: The Company’s fiscal year coincides with the calendar year.
October 12, 2012
Long-Term Growth
The Company remains focused on future growth by continuing to invest in new products, international expansion, and evaluating acquisitions that strengthen its core. The Company is well positioned to capitalize on the emerging technologies and global trends that are impacting its business. Management feels its working teams are aligned and CBE has ample resources to execute its long-term strategies.
The Company continues to expand its global commercial footprint to improve penetration in China, the Middle-East, and South America, where auto sales, steel, chemical, and oil and gas industries are flourishing. It believes the diversity of the end market balance in portfolio continues to be a real asset.
Energy-related projects and energy efficient demand drove growth. Over the long term, the analysts believe that CBE will benefit from the combination of efficient and effective operating model, leadership position in many of its industrial, utility and construction markets, and also from secular market tailwinds. Through a combination of acquisitions and organic growth, the Company is believed to have made a shift in its mix of business from one being heavily influenced by commercial and residential to another with heavier emphasis on industrial and utility markets. The analysts also believe that CBE is wisely focusing on main secular growth drivers, which are expected to provide a sustained growth tailwind for the next several years.
The long-term growth drivers include market share gains from leveraging broad product line through aggressive distribution sales initiatives (The Cooper Connection) and benefits from comprehensive overhaul of business systems infrastructure.
The Company’s acquisition by Eaton is in progress, with secured U.S. antitrust approval, pending Europe and China antitrust and Eaton acquisition financing inplace. Till the closure of this deal,nothingsubstantial can be said about the long-term prospects of the Company.
June26, 2012
Target Price/Valuation
Provided below is the summary of valuation and ratings as compiled by Zacks Research Digest:
Rating DistributionPositive / 16.67%↓
Neutral / 83.33%↑
Negative / 0.0%
Avg. Target Price / $73.50↑
Digest High / $76.00↑
Digest Low / $72.00↑
No. of analysts with Target Price/Total / 6/12
Risks to the target price include global macro environment, currency movements, commodity price inflation, M&A integration, and changes in the competitive or regulatory environment.
Recent Events
On August 23, 2012, Cooper Wiring Devices, developed a new product GameChanger for the healthcare industry. It introduced industry’s first line of switches and wallplates made with EPA registered CuVerro Antimicrobial Copper Surfaces.
On August 8, 2012, Photometric Laboratory, which is a part of its LED Innovation Center Cooper Lighting, received LED Lighting Facts(R) Testing Laboratory Approval.
On July 25, 2012, Cooper Industries, plc reported 2Q12 earnings of $1.17 per share, exceeding the year-ago quarter’s earnings per share by 22%. The results were 4.5% higher than the Zacks Consensus Estimate of $1.12 a share.
On July 16, 2012, Cooper Industries plc came up with a solution to recover from summer storms. The Company will provide support and safety to the communities and prepare them to withstand powerful storms by mass notification systems, seismic bracing solutions, and portable power options.
On June 19, 2012, the global Envirotemp FR3 fluid business and brand from Milwaukee-based Cooper Power Systems, a subsidiary of Cooper Industries plc, was purchased by Cargill.
Revenue
The Company’s total revenue grew 7.4% year over year to $1.47 billion in 2Q12. Revenues were in line with the Zacks Consensus Estimate. The increasing potential in the U.S. industry triggered the sales growth in the quarter. Core revenue grew 5.5%, thanks to a positive impact from acquisitions of 3.6%, partially offset by an unfavorable impact of 1.7% from foreign currency translation.
Emerging markets witnessed double-digit core revenue growth on a year-over-year basis in the quarter, except for China, which recorded negative revenue growth.Core European growth was 1.3%, helped by industrials and energy project activity.
Industrial end markets contributed the maximum to the total sales. Utility end markets remained healthy in the quarter. CBE’s transformer and line products businesses were also strong. After back-to-back quarters of double-digit growth, retail business declined in this quarter. The commercial construction market has shown slight improvement based on retrofits and remodeling.
Cooper Industries benefitted from the rising investments in energy globally, leveraging the Company’s growth initiatives from its new products, acquisitions, and key global investments. Industrial, utility, and energy markets are expected to rapidly expand and the industrializing economies will help offset some of the declines in the already developed regions. This will eventually help to support higher growth rates for the current year.
Revenue ($million) / 2Q11A / 4Q11A / 2011A / 2Q12A / 3Q12E / 4Q12E / FY12E / FY13EDigest High / $1,369.0 / $1,373.1 / $5,409.4 / $1,470.0 / $1,508.0 / $1,493.0 / $5,874.0 / $6,471.0
Digest Low / $1,368.9 / $1,373.0 / $5,409.0 / $1,469.7 / $1,478.0 / $1,432.0 / $5,784.0 / $6,094.5
Digest Average / $1,368.9 / $1,373.1 / $5,409.3 / $1,469.9 / $1,490.2 / $1,460.8 / $5,820.3 / $6,237.9
YOY Growth / 2.4% / 9.0% / 6.8% / 7.4% / 7.2% / 6.4% / 7.6% / 7.2%
Q/Q Growth / 7.1% / -1.2% / 4.7% / 1.4% / -2.0%
Segment Details
Electrical Products Group: The Electrical Products segment (EPG) comprises Cooper B-Line, Cooper Bussmann, Cooper Lighting and Cooper Wiring Devices.
Revenues from the Electrical Products Group increased 9.4% year over year to $676.1 million. The year-over-year growth was attributable to 4.2% core revenue growth and6.2% acquisitions contribution,offset by 1.0% negative foreign currency translation impact.Revenues in the segment were augmented by the huge demand in the global industrial and energy markets.
Energy & Safety Solutions: The Energy & Safety Solutions(ESS) business comprises three of Coopers’ business units: Crouse-Hinds, Cooper Power Systems and Cooper Safety. Cooper sells primarily into two market areas, Energy Efficiency and Energy Transmission & Storage (ET&S).
Revenue in the Energy & Safety Solutions segment rose 5.7% year over year to $793.6 million. Core revenues in the quarter grew 6.6% year over year, with business acquisitions contributing 1.5% to revenue, offset by 2.4% negative foreign currency translation impact. Utility, heavy industrial and energy markets augmented the segment’s revenue growth. High demand for energy intensive products as well as improved production levels offset headwinds arising from the weak economy in China and residential and non-residential construction business.
($ in million) / 2Q11A / 4Q11A / 2011A / 2Q12A / 3Q12E / 4Q12E / FY12E / FY13EElectrical Products Group / $617.9 / $630.8 / $2,483.0 / $676.0 / $691.2 / $668.8 / $2,688.0 / $2,789.5
Energy & Safety Solutions / $751.1 / $742.3 / $2,926.6 / $793.9 / $795.8 / $771.3 / $3,112.2 / $3,305.0
Overall Guidance
Cooper Industries’ good performancein the energy and overall industrial sectors helped offset the unfavorable economic condition in Europe. In the ESS segment, oil and gas markets drove the growth where as EPG growth was attributed to higher commercial and industrial activity related to oil and gas projects. Residential construction continued to show a recovery with a rise in housing development.
In the near term, robust sales growth is anticipated from oil and gas infrastructure and LED and efficient lighting is expected to drive double-digit growth in sales. The other key areas of focus are demand for electrical grid upgrades and growth in safety and mass notification technologies.
Margins
Gross margin expanded 166 basis points (bps) to 35.4% in 2Q12 from 33.7% in 2Q11. The Company’s cost minimization strategy and new product launches augmented the gross margin. Operating earnings in the quarter also jumped 84 bps to 16.7% from 15.8% in the year-ago quarter. The reason behind margin expansion wasimproved price/material economics and productivity and lower structuring costs.
Provided below is a summary of margins as compiled by Zacks Digest:
Margins / 2Q11A / 4Q11A / 2011A / 2Q12A / 3Q12E / 4Q12E / FY12E / FY13EGross / 33.7% / 32.2% / 33.2% / 35.4% / 35.0% / 34.6% / 34.8% / 35.5%
Operating / 14.8% / 13.2% / 14.0% / 15.5% / 15.1% / 15.3% / 15.0% / 15.8%
Pre Tax / 14.6% / 13.7% / 14.0% / 15.6% / 15.4% / 15.3% / 15.3%
Net / 11.8% / 11.7% / 11.8% / 12.9% / 12.5% / 12.5% / 12.5% / 12.9%
Segment Margin Details
Electrical Products: The Electrical Products operating earnings showed a rise of 7.3% to $99.9 million. The segment operating margin was 14.8% versus 15.1% in the year-ago quarter.Excluding the impact of acquisitions, segment operating margin increased 50 basis points to 15.6%. The acquisition of lower margin Martek businesswas responsible for this margin dilution.
Energy & Safety Solutions: Operating earnings of the Energy & Safety Solutions surged 20.4% year over year to $160.8 million. The segment operating margin in the quarter increased 20.3% from 17.8% in the year-ago quarter.
Provided below is a summary of segmental margins as compiled by Zacks Digest:
Segment Margins / 2Q11A / 4Q11A / 2011A / 2Q12A / 3Q12E / 4Q12E / FY12E / FY13EElectrical Products Group / 15.1% / 13.3% / 14.2% / 14.8% / 14.9% / 14.8% / 14.7% / 15.1%
Energy & Safety Solutions / 17.8% / 16.0% / 16.9% / 19.5% / 18.9% / 19.0% / 19.0% / 19.6%
Outlook
In the near term, the Company will continue to focus on constraining costs and selectively investing in strategic initiatives.
Earnings per Share
Cooper Industriesreported 2Q12 earnings per share from continuing operations of $1.17 per share, up 22% y/y. The results were 4.5% above the Zacks Consensus Estimate of $1.12 a share.The performance in the quarter was attributed to development in the Company’s energy intensive market.
Provided below is a summary of EPS as compiled by Zacks Digest:
EPS / 2Q11A / 4Q11A / 2011A / 2Q12A / 3Q12E / 4Q12E / FY12E / FY13EDigest High / $0.96 / $1.01 / $3.90 / $1.18 / $1.20 / $1.17 / $4.59 / $5.26
Digest Low / $0.96 / $1.00 / $3.86 / $1.17 / $1.10 / $1.07 / $4.35 / $4.70
Digest Average / $0.96 / $1.00 / $3.87 / $1.17 / $1.14 / $1.12 / $4.45 / $4.88
Digest y-o-y / 19.8% / 17.3% / 20.5% / 22.1% / 16.3% / 11.7% / 14.9% / 9.8%
Digest q-o-q / 3.3% / 2.1% / 15.3% / -2.9% / -1.9%
Guidance
The Companydid not provide any guidance due to its pending acquisition by ETN.
StockResearchWiki.com – The Online Stock Research Community
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Research Analyst / Isha ShahCopy Editor / Dipayan Bhattacharjee
Content Ed. / Naseem Aslam
QCA / Payal Jalan
Lead Analyst / Vandana Sharma
No. of brokers reported/Total brokers / 14/14
Reason for Update / 2Q12 earnings update