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Eaton to Sell Hydraulics for $3.3B, Focus on Core Business

Zacks Equity Research

Eaton Corporation Plc ETN announced that it has entered into a definite agreement to sell the Hydraulics business for $3.3 billion in cash to Danfoss A/S, a Danish industrial company. This deal is part of Eaton’s ongoing transformation that will propel the company to boost growth and lead to earnings consistency.

The deal is expected to close by the end of this year, and is subject to customary closing conditions and regulatory approvals. Earlier this year, Eaton announced that it has completed the sale of the Automotive Fluid Conveyance Division to Quantum Capital Partners.

Reasons Behind Hydraulics Business Deal

This business, which had generated sales of $2.2 billion in 2019, accounted for 86% of Eaton’s Hydraulics segment revenues. The company is retaining the Filtration and Golf Grip businesses currently reported in the company’s Hydraulics segment. In 2018, the hydraulics segment had contributed $2.8 billion to total revenues.

Performance of the Hydraulics was unimpressive in 2019, primarily due to continued weakness in the global mobile equipment market. Eaton had projected a 4.5% decline in organic revenues from this segment in 2019.

Since weak results from this segment have been adversely impacting Eaton’s overall performance, focusing on core operations seems to be a more productive option for the company.  Eaton’s Electrical Products, Electrical Systems and Services, and Aerospace segments contributed nearly 80% to its segment operating profit in third-quarter 2019. Post divestment of the Hydraulics business, Eaton will focus more on these segments.

Eaton’s Acquisition and Divestiture in 2019

Last year, Eaton had entered into an agreement to sell the Lighting business to Signify N.V. for a cash purchase price of $1.4 billion. The company had also entered into an agreement to acquire Innovative Switchgear Solutions, Inc. , a specialty manufacturer of medium-voltage electrical equipment. During the year, the company had also completed the acquisition of Souriau-Sunbank Connection Technologies business of TransDigm Group Inc. TDG. These acquisitions and divestitures are part of the company’s ongoing transformation, and enable it to further strengthen core operations.  

Large Product Base Helps

Eaton sells products in a number of markets and faces a wide array of competitors in varied niches. The quality of products supplied by the company enables it to retain strong market position. Eaton supplies products to around 175 countries and most importantly, this in a sense provides stability to the company’s revenue generation ability, as the loss of a customer will not have any significant impact on revenues and margins.

Rising production of Lockheed Martin’s LMT F-35s will come as a relief for Eaton. Its order book is likely to be adversely impacted in 2020, thanks to Boeing Company’s BA decision to temporarily stop the production of Boeing 737. Notably, Eaton supplied Stabilizer trim actuator for Boeing 737 model.

Price Performance

The company’s shares have outperformed its industry in the past 12 months.

Zacks Rank

Eaton currently carries a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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