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Eaton to Buy TransDigm's Unit, Expand Aerospace Business

Zacks Equity Research

Eaton Corporation plc ETN announced that it has entered into an agreement to acquire TransDigm Group’s arm TDG, Souriau-Sunbank Connection Technologies, for $920 million. This acquisition, which is expected to close by the end of 2019, is in sync with the company’s objective to gain from long-term prospects in global aerospace and industrial markets.

How Will Souriau-Sunbank Buyout Aid Eaton?

Souriau-Sunbank has the capacity of providing highly engineered electrical interconnect solutions for harsh environments for customers in aerospace, defense, industrial, energy, and transport industries. TransDigm’s Souriau-Sunbank Connection Technologies business will be a great fit for Eaton’s existing aerospace business.

The Aerospace segment of Eaton currently contributes nearly 9.5% of total revenues. We expect contribution from aerospace to further improve from 2020, once the business integration is over after the acquisition.

The new long-term forecast from Boeing BA indicates a huge demand for new commercial jets over the next two decades. Souriau-Sunbank’s highly reliable products that provide complete interconnect solutions supporting aircraft wiring systems with aircraft connectors, backshells, wire protection, cable assemblies and contacts will allow Eaton to gain from the rising demand for new jets.

In addition, the expertise of Souriau-Sunbank in industrial, energy, and transport markets will allow Eaton to tap new customers in these business areas.

Inorganic Growth

Eaton continues to expand global operations through strategic acquisitions, which help it expand market reach and add to the existing customer base. During Eaton's first-quarter 2019 earnings release, the company revised its earnings guidance for 2019 to accommodate the accretion from the Ulusoy Electric business acquisition, which was completed this April.

Post first-quarter earnings release, Eaton expected this acquisition to contribute $100 million to total revenues in 2019. We expect contribution from acquired assets to be y/y higher in the current year, as Eaton acquired another company to support the electric business. (Read: Eaton Buys ISG, Expands Medium-Voltage Switchgear Business)

Price Performance

Shares of Eaton have outperformed its industry in the past six months.

Zacks Rank & Key Pick
Currently, Eaton has a Zacks Rank #3 (Hold). A better-ranked stock in the same industry is AZZ Inc. AZZ, currently sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AZZ reported average positive surprise of 2.12% in the last four quarters. Its Zacks Consensus Estimate for fiscal 2020 has moved up 2.8% in the past 60 days to $2.59.

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