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Eaton (ETN) Down 5.3% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Eaton (ETN). Shares have lost about 5.3% 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 its most recent earnings report in order to get a better handle on the important catalysts.

Eaton's Q2 Earnings Beat Estimates, Revenues Miss

Eaton Corporation reported second-quarter 2019 earnings of $1.53 per share, which surpassed the Zacks Consensus Estimate by a penny. The reported earnings were at the higher end of management’s guided range of $1.45-$1.55 per share. Moreover, the bottom line marked a 10% improvement from the year-ago level.    

Revenues

Total revenues in the quarter came in at $5,533 million, lagging the Zacks Consensus Estimate of $5,648 million by 2%. However, quarterly revenues were 0.8% higher than the year-ago quarter.

The year-over-year revenue increase, which includes 2.5% organic sales growth, was partially offset by a 1.5% negative impact from currency translation.

Segment Details

Electrical Products’ total second-quarter sales were $1,849 million, up 2.4% from the year-ago level. Although organic sales were up 4% from the prior-year quarter, the metric was negatively impacted by 2% due to currency translation. Operating income was $361 million, up 8.1% year over year.

Electrical Systems and Services’ total sales were $1,582 million, up 4.6% from the year-ago quarter. While organic sales were up 5% from the year-ago quarter, the metric was negatively impacted by 1% due to currency translation. Notably, the acquisition of Ulusoy added 1% to sales. Operating income in the quarter was $275 million, up 21.1% year over year.

Hydraulics total sales were $698 million, down 3.5% from the year-ago quarter. Organic sales, flat year over year, were negatively impacted by 3% due to currency translation. Operating income in the quarter was $80 million, down 20.8% year over year.

Aerospace total sales were $517 million, up 11.7% from the year-ago quarter due to 13% organic sales growth. Additionally, operating income in the quarter was $127 million, up 41.1% year over year.

Vehicle total sales were $803 million, down 10.7% from the year-ago quarter, owing to a 9% decline in organic sales and 2% negative currency translation. Moreover, operating income in the quarter was $136 million, down 18.1% year over year.

eMobility segment’s total sales were $84 million, up 1.2% from the year-ago quarter. Organic sales, up 2% from the prior-year level, were negatively impacted by 1% due to currency translation. Operating income in the quarter was $7 million, down 50% year over year, primarily due to higher spending on research and development activities.

Quarterly Highlights

Segment margins in the reported quarter were 17.9%, up 90 basis points (bps) from the year-ago level.  Cost of products sold in the reported quarter was $3,697 million, up 0.7% from the year-ago figure.  Selling and administrative expenses were $907 million, up 0.7% from the year-ago quarter.

The company’s research and development expenses in the second quarter were $151 million, up 4.1% from the prior-year period. Interest expenses of $63 million were down 7.3% from the prior-year quarter. Orders in Electrical Products, Electrical Systems and Services, and Aerospace were up 1%, 3% and 15% year over year, respectively. On the contrary, Hydraulics’ orders were down 8% year over year due to weakness in the global mobile equipment market.

The company repurchased shares worth $260 million year to date.

Financial Update

Eaton’s cash & cash equivalents were $412 million as of Jun 30, 2019 compared with $283 million on Dec 31, 2018. As of Jun 30, 2019, long-term debt of the company was $8,079 million, up marginally from $6,768 million on Dec 31, 2018.

Guidance

Third-quarter 2019 earnings per share are expected between $1.50 and $1.60.  The company now expects 2019 earnings within $5.77-$5.97, up from the prior guided range of $5.72-$6.02 per share. Segment operating margin in 2019 is expected within 17.1-17.5%.

Eaton has plans to repurchase shares worth $600 million in 2019.

The company expects organic revenues to improve 3% in 2019, down 100 bps from the prior expectation.
 

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

Currently, Eaton has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. 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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