--Buy 700 shares to Marathon Oil (MRO) at $36.87
--Open with 500 shares of United Technologies (UTX) at $118.07
--Close Whole Foods (WFM) at $49.67
Eaton (ETN) reported in-line first-quarter earnings and guidance this morning. The full-year outlook was reiterated but lowered for the second quarter on a restructuring charge in its industrial segment. We've been selling this position for the past few weeks (most recently on April 23 at a price of $74.36), and we will likely continue to do so when our restrictions are lifted, taking our 62% gains.
Eaton has been one of our favorite names, but we see more upside in four of our other industrials. Cummins (CMI) reported today with a beat and a raise. General Electric (GE) posted the strongest organic growth in the industrial sector so far as it transitions to its traditional industrial roots. Stanley Black & Decker (SWK) also posted a solid 1Q. Boeing's (BA) stock is down after beating forecasts and raising estimates. Johnson Controls (JCI) is the other industrial that we own, and its quarter was a disappointment due to the mix of its client base in the HVAC division. This is why the new CEO is making acquisitions to improve the mix into more residential business, with improved products and distribution. We believe it will pay off for the company and that the 10% decline is overdone.
Also, we've been eyeing United Technologies (UTX) since it reported earnings last week. We are surprised that the stock has lagged the group from when it beat estimates and raised guidance. We like the combination of its U.S. commercial construction exposure and its international aerospace operations. After you receive this Alert, we will buy 500 shares at $118.07. We will write more about this in another alert. We'll also add 700 shares to Marathon Oil (MRO) at $36.87 to further build out the position. Finally, we are going to sell out of Whole Foods (WFM) at $49.67 because we do not like the pin action and the battle it will have given the heightened competition, even as we believe it is over exaggerated. We are flattish on the position, so we will move on.
Meanwhile, Eaton's quarter was solid, with earnings, revenues and margins all in line with consensus. Reported revenues grew 3.5%, with 4.5% organic growth and a negative 1% currency impact at $5.49 billion. The clear highlight was the organic growth of 4.5%, which was ahead of the 3% to 4% consensus. Strength came from Hydraulics, which grew 3% from a year ago; Aerospace, which rose 7%; and Vehicles, which gained 6%. All were higher vs. expectations. This isn't surprising as this is where we've seen strong results from several players in these segments.
Electrical was mixed, with in line Products and weaker Systems & Services. Operating margins were in line at 14.5%, with strength in Hydraulics at 14.3% and Vehicles at 15.2% and softer Electric (both Products at 16.2% and Systems & Services at 12.8%). Aerospace was 13.4%. Bookings were strong in Electrical Products rose 6%, Hydraulics rose 9% and Aerospace rose 2%, offset by Electrical Systems & Services, which fell 6% largely tied to weather.
Guidance was reiterated for the full year at $4.50 to $4.90 per share with a midpoint at $4.70, and 3% end-market growth. The second quarter's new guidance is $1.05 to $1.15 per share vs. the prior estimate, which excludes the sales of its two Aerospace businesses and a new Industrial restructuring that will affect the second quarter by $0.08 per share for savings of $0.07 per share in 2015.
Fundamentally, the story is on track, but lack of earnings upside (part weather but part end-market mix) leaves us unenthusiastic about the shares and we think it's time to move on. We will do so when our restrictions are lifted and replace ETN with today's purchase of UTX.
After our trades, we'll own 1,500 MRO shares, or 2% of the portfolio; 500 UTX shares, or 2.1%; and we'll be out of WFM.
Regards,
Jim Cramer, Stephanie Link, and TheStreet Research Team
DISCLOSURE: At the time of publication, Action Alerts PLUSwas long MRO, WFM, CMI, GE, SWK, JCI.