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Eaton (ETN) Down 4.7% Since Last Earnings Report: Can It Rebound?

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  • ETN

It has been about a month since the last earnings report for Eaton (ETN). Shares have lost about 4.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Eaton due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Eaton Q3 Earnings Surpass Estimates, Revenues Lag

Eaton Corporation reported third-quarter 2021 earnings of $1.75 per share, which surpassed the Zacks Consensus Estimate of $1.73 by 1.2%. Furthermore, earnings were up 30% year over year. The bottom line was within the expected range of $1.72-$1.82 per share.

GAAP earnings for the reported quarter were $1.57 per share compared with $1.11 in the year-ago period. The difference between GAAP and operating earnings for the reported quarter was due to charges of 25 cents associated with intangible amortization and 6 cents related to a multi-year restructuring program, and an income of 13 cents pertaining to acquisitions and divestitures.

Revenues

Total quarterly revenues came in at $4,923 million, which missed the Zacks Consensus Estimate of $5,045 million by 2.4%. Total revenues, however, improved 8.8% from the year-ago quarter.

The year-over-year improvement is due to 8% growth in organic sales, 7% from acquisitions and 1% from positive currency translation, partially offset by a 7% decline from the Hydraulics business divestiture completed during the quarter.

Segment Details

Electrical Americas’ total third-quarter sales were $1,854 million, up 9.1% from the year-ago level. This improvement was due to improved organic sales and contribution from the acquisition of Tripp Lite.

Electrical Global’s total sales were $1,421 million, up 18.8% from the year-ago quarter. Organic sales were up 18% from the year-ago quarter. Positive currency translation added another 1% to this segment’s sales.

Hydraulics’ total sales were $179 million, down 59.2% from the year-ago quarter.

Aerospace total sales were $745 million, up 37.9% from the year-ago quarter. This was due to improved organic sales, contribution from the acquisition of Cobham Mission Systems and positive currency translation.

Vehicle total sales were $640 million, up 11.7% from the year-ago quarter driven by an improvement in organic sales and positive currency translation.

eMobility segment’s total sales were $84 million, up 6.3% year over year due to improvement in organic sales.

Highlights of the Release

Selling and administrative expenses were $834 million, up 10.6% from the year-ago quarter.

On Aug 2, the company completed the Hydraulics unit’s sale to Danfoss.

Its third-quarter research and development expenses were $152 million, up 15.2% from the prior-year period. Interest expenses for the quarter were $37 million, down 9.8% from the year-ago period.

Orders in Electrical Americas and Electrical Global were up 17% and 17% year over year, respectively. Orders from the Aerospace segment were up 4% from third-quarter 2020 due to strength in the jet markets.

Financial Update

Eaton’s cash was $271 million as of Sep 30, 2021 compared with $438 million on Dec 31, 2020.

As of Sep 30, 2021, the company’s long-term debt was $8,520 million, up from $7,010 million on Dec 31, 2020.

Guidance

Eaton’s fourth-quarter 2021 earnings are expected in the range of $1.68-$1.78 per share. It now expects organic revenue growth in the range of 7-9% for the fourth quarter.

Eaton now expects organic revenue growth within 9-11% for 2021. Segment operating margin for 2021 is now expected in the range of 18.6-19%.

The company expects its 2021 earnings guidance in the range of $6.59-$6.69 per share. It is targeting share buyback in the range of $375-$425 million in 2021. The company’s segment operating margin is expected to be 18.6-19% in 2021.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, Eaton has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Eaton has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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