Eaton Beats Q4 Earnings Ests, Guides Well

Zacks

Industrial manufacturer Eaton Corporation's (ETN) fourth quarter earnings per share of $1.08 surpassed the year-ago figure of 82 cents by 32.0% and the Zacks Consensus Estimate of $1.06 by 1.9%.

Eaton’s GAAP earnings during the fourth quarter were $1.00 per share, up 63% from 46 cents reported in the year-ago quarter. The difference between GAAP and operating earnings was due to charges of 8 cents related to integrating recent acquisitions.

In 2013, Eaton earned $4.13 per share, beating the Zacks Consensus Estimate by a penny and the year-ago earnings of $3.94 by 4.8%.

Revenue

Eaton’s fourth quarter total revenue was $5.5 billion, up 27.6% from $4.33 billion a year ago. Quarterly revenue was $19 million higher than the Zacks Consensus Estimate.

Revenue in 2013 was $22 billion, falling short of the Zacks Consensus Estimate by $56 million. However, total revenue in 2013 was up by 35% from $16.3 billion reported in 2012.

The strong performance in the reported quarter was attributable to growth in core sales backed by solid contribution from the acquired assets. The positive were marginally offset by unfavorable foreign currency exchange.

Operating Update

Cost of product sold in the reported quarter was $3.88 billion, increasing 23.9% from the prior-year period.

Selling and administrative expenses also followed a similar trend, increasing 22.8% to $1 billion from $0.8 billion in the prior year.

Research and development expenses increased 30.9% to $0.16 billion.

Total segment operating profit was up 50.1% to $0.8 billion from $0.5 billion.

Segment Analysis

Electrical Product:  Total segment revenue was $1.8 billion, up 57.4% from the year-ago quarter, reflecting the impact of the Cooper Industries acquisition. Operating profit, excluding acquisition integration charges of $20 million, was $296 million, up 64% from the year-ago comparable period.

Electrical Systems and Service: Segment revenue was $1.6 billion, up 37.5% from the year-ago quarter, reflecting the impact of the Cooper Industries acquisition. Operating profit, excluding acquisition integration charges of $11 million, was $232 million, surging 54% year over year.

Hydraulics: At $0.7 billion, Hydraulics sales improved nearly 3% over the prior year, while operating profit excluding integration charges came in at $92 million, up 80% from the corresponding quarter last year.

Aerospace: Segment sales in the quarter grew 2.8% to $0.4 billion while operating profit was up 31.0% to $59 million.

Vehicle: Segment revenue was up 6.8% year over year to $0.93 billion. Operating income of $127 million improved 30% from the year-ago quarter.

Financial Health

Cash and short-term investments as of Dec 31, 2013 were $0.9 billion versus $0.6 billion as of Dec 31, 2012.

Long-term debt was $8.96 billion as of Dec 31, 2013 compared with $9.76 billion as of Dec 31, 2012. This shows that Eaton lowered its debt level over the last twelve months.

Guidance

Eaton expects 2014 pro forma earnings in the range of $4.50–$4.90 per share. The guidance excludes acquisition integration charges. In addition, the guidance did not take into consideration any gain arising from the divestiture of the two aerospace units.

Eaton expects its market to improve by 3% from the year-ago level. First quarter 2014 pro forma earnings are expected in the range of 95 cents to $1.05 per share. The guidance excludes acquisition integration charges.

Other Company Releases

A. O. Smith Corporation (AOS) reported earnings of 52 cents per share in the fourth quarter, beating the Zacks Consensus Estimate of 50 cents by 4%.

Parker-Hannifin Corporation (PH) reported earnings of $1.24 per share in the second quarter fiscal 2014, missing the Zacks Consensus Estimate by a penny.

Rexnord Corporation (RXN) reported third quarter fiscal 2014 earnings of 32 cents, in line with the Zacks Consensus Estimate.

Our View
 
Eaton was able to beat expectation, thanks primarily to the contribution from acquired assets. A steady investment in R&D also helps the company to produce new products and stay ahead of competition.

Eaton's bookings in the reported quarter were impressive. We expect the company  to build from its current position, given its diversified portfolio of products.

Last month Eaton decided to shed some of its assets from the Aerospace Group. The divestment of these assets will enable Eaton to focus more on hydraulics, fuel, conveyance, motion control and engine solutions divisions of the Aerospace Group.

Strategic acquisitions and the divestment of non-core assets will strengthen Eaton's existing portfolio.  This will also ensure the best possible returns for its shareholders.

Eaton Corporation currently has a Zacks Rank #2 (Buy).

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