We're Powering Up as We Add This Electrical Firm to the Bullpen

* AI, data center and infrastructure electricity needs have us adding Eaton shares to the Bullpen.

Here's why we're adding Eaton Corp ETN to the Bullpen.

Even before we learned of greater spending on AI and data centers last week from Microsoft MSFT, Alphabet (GOOGL), and Meta META, the International Energy Agency (IEA) already forecasted electricity use to more than double by 2026 compared to 2022 usage. 

According to the report, 460 terawatt hours (TWh) were consumed by data centers in 2022, roughly 2% of all global electricity usage. Because computing power and cooling are the two most energy-intensive processes within data centers, the rapid growth of artificial intelligence-related services over the last 12 months means providers have been investing in power-hungry GPUs.

Per the IEA, that electricity usage could hit between 650TWh and 1,050TWh by 2026 depending on the pace of deployments.

To put some perspective around this, such an increase is equivalent to adding the entire power consumption of a country like Sweden at the lowest end of the scale, or Germany at the highest. At the heart of it, supporting accelerating AI/ML adoption requires more power and cooling than much of the existing data center inventory can accommodate.

Here’s the thing. Existing markets are already struggling to meet demand, the report says. In Northern Virginia, the largest data center market in the world at 3,400MW, availability is running at just 0.2%.

To borrow a line from Tim Allen’s "Tim the Tool Man" character, we’re going to need more power. As we move through the current earnings season, we’ll be pouring over capital spending plans for capacity improvements from the likes of ConEd ED, Dominion Power (D), Duke Energy DUK, Southern Co SO, and the like. 

As noted above, it also has us adding the shares of Eaton Corp. to the Bullpen.

Why Eaton? It is a power management company that not only serves data centers and utilities but also industrial, commercial, machine building, residential, aerospace, and mobility markets. That non-data center, non-utility exposure positions Eaton to benefit from infrastructure spending as well as the eventual build-out of EV charging infrastructure.

Eaton reports its revenues across four operating segments, but as we see below, the one that really drives its top and bottom line is Electrical Americas and Electrical Global.

Electrical Americas and Electrical Global (70% of 2023 revenue, 76% of 2023 operating profit) - Electrical components, industrial components, power distribution and assemblies, a related services.

Aerospace (15% of sales, 15% of operating profits) - Aerospace fuel, hydraulics, and pneumatic systems for commercial and military use, as well as filtration systems for industrial applications.

Vehicle (13% of sales, 9% of operating profits) - Drivetrains, powertrain systems, and critical components that reduce emissions and improve fuel economy, stability, performance, and safety of cars, light trucks, and commercial vehicles.

eMobility (3% of sales, 0% of operating profits) - Mechanical, electrical, and electronic components and systems that improve the power management and performance of both on-road and off-road vehicles.

Given the nature of its business, some of the company’s major raw materials include iron, steel, copper, nickel, aluminum, silver, and gold. Given our position in SDPR Gold GLD, we know gold prices have soared since early October, but so too have copper prices and to a lesser extent silver.

When Eaton reports its quarterly results on April 30, we’ll be taking stock of book-to-bill and backlog metrics for its reporting segments as well as comments on input costs and pricing. As we put those thoughts together, we’ll also start contemplating potential price targets as well as downside risk scenarios. 

At the time of publication, TheStreet Pro Portfolio was long MSFT, GLD.