Eaton (ETN) reported earnings Wednesday morning, and the company delivered against easy prior-year comparisons. Seeing as the firm missed consensus estimates over the last three quarters, these most recent results showed enough progress that shares were up more than 1% in recent trading.
CEO Sandy Cutler had no room for error given the recent missteps, and we are pleased to see the numbers, and what appears to be cautiously optimistic guidance. We suspect that analysts want to wait until another quarter is under their belts in order to see if the company is back on track in terms of execution, but we are encouraged with the margin improvement, overall bookings and commentary on cash deployment. The latter could come as early as mid-2015 -- and that means deals, share buybacks and/or dividend increases.
On the cash deployment comment, management indicated that it will likely have as much as $1 billion in cash for these kinds of actions as it generates better cash flow in the seasonal uplift, and we believe this would be a positive for the stock. If the company then decides to leverage up the balance sheet -- after getting to its stated 1.5x net debt leverage ratio -- that would be more of a 2016 event and an even bigger development. This, whether or not it’s by coincidence, is Cutler’s retirement year.
These are more mid-to-longer-term potential catalysts, but were glad to hear the company is thinking about shareholder value creation.
Shares were up 3% Tuesday following the Cummins (CMI) report, and are seeing nice follow-through in today’s climb. This is a very under-owned stock following last quarter’s “give-up” among both investors and the sell-side analysts. It won’t take much for the stock to get to the low $70s, in our view, and for it to regain investor interest.
As for that report, third-quarter earnings rose 15% year over year to $1.29 per share vs. the $1.23 consensus analyst estimate, and revenue was in line at $5.7 billion. That latter figure represents year-over-year growth of 5.7%, and 3% core growth, thanks to better-than-expected margins and solid volumes (except in the Hydraulics segment).
After last quarter, we were pleased to see the improvement in the Electrical divisions, which generate 60% of total revenue, and we were not surprised at the strength in Vehicles (trucks) and Aerospace. This is pretty consistent with other industrial names, such as United Technologies (UTX), Cummins (CMI), Stanley Black & Decker (SWK) and Lear (LEA). The company’s incremental margin improved to 34%. That, in turn, led to a 40-basis-point rise in segment margins vs. the prior year -- to a record of 16% -- on better productivity and cost controls.
The company’s cash flow stands at a record at $943 million, and Eaton bought back its highest level of shares year to date -- $225 million worth, against $324 million year to date. Cooper synergies remain on track, as $95 million worth is expected this year and $150 million is anticipated in 2015. Restructuring savings are also on plan, totaling $43 million within the company’s Industrial segment. Guidance was narrowed for the full year, to between $4.55 and $4.65, vs. the $4.54 consensus, as lower core growth of 2% from 3% was offset by higher operating margins. We expect earnings to move higher following the report.
The stock usually trades on bookings, as this is typically a sign of improved visibility. Now Eaton has to convert that into sales, but it is a good step nonetheless. With that in mind, Electrical Products bookings rose 5%, reflecting regional strength in Americas and Asia-Pacific (APAC). That came on notable strength in lighting -- whose volumes were up 19% year over year -- led by LED, which now accounts for 45% of total volume. Core revenue rose 4% in this segment.
Meanwhile, bookings in Electrical Systems & Services rose 3%, also thanks to strength in the Americas and APAC, as well as a 200-bps sequential improvement in margins. This was one of the issues that worried investors in the second quarter, so it’s good to see the company has snapped back. The 2% core sales rise was also encouraging. Aerospace bookings increased 12%, reflecting an acceleration from 9% last quarter. This was led by commercial and military, as well as aftermarket shipments, and core sales rose 6% year over year.
Also, Vehicle core sales rose 6%, and management now expects NAFTA truck builds to increase to 295,000 units. The offset was Hydraulics, which saw bookings down 6% -- almost entirely from the weak Agriculture market and soft China construction equipment.
Regards,
Jim Cramer, Stephanie Link, and TheStreet Research Team
DISCLOSURE: At the time of publication, Action Alerts PLUSwas long ETN.