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Eaton's (ETN) Wide Reach and R&D Aid Amid Weak End Markets

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Zacks Equity Research
·4 min read
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We recently updated a research report on Eaton Corporation ETN. The company is poised to benefit from wide market reach, acquisitions, spin-off of less profitable businesses, strong cash flow generation, share buybacks and product innovation. However, ongoing weakness in end-market conditions and prevailing uncertainty across the globe as a result of the COVID-19 pandemic can offset some of the positives.

Tailwinds

Eaton has been consistently investing in R&D programs to introduce new products, including power management solutions, which reduces energy consumption and carbon emissions. The company has been upgrading the existing systems to maintain its strong position in global markets. The company continues to churn out new products in a bid to facilitate effective and easy power management. Its strategy of manufacturing in the zone of sale has helped it offset the impact of tariff on material prices.

The company made accretive acquisitions like that of Power Distribution and sold the less profitable lighting business for $1.4 billion during the first quarter. It also entered into an agreement to sell the Hydraulics business for $3.3 billion in cash. These divestitures will allow Eaton to focus on higher-margin core businesses. Contribution from acquired assets boosted total revenues by 2%, while the divested assets negatively impacted the same by 3.5% in the first quarter.

It continues to generate a stable cash inflow through proficient handling of operating activities. In 2019, the company’s operating cash flow and free cash flow were $3.5 billion and $2.9 billion, respectively. It expects 2020 free cash flow in the range of $2.3-$2.7 billion. In addition to utilizing funds for growth ventures and several other activities, a strong cash generating capacity supports the company’s systematic debt-reduction initiatives and shareholder-friendly moves.

Headwinds

Owing to the prevailing economic uncertainty across the globe as a result of the COVID-19 pandemic, Eaton decided to withdraw its full-year 2020 guidance. The company expects decremental margins of 25-30% for the full year owing to the pandemic.

Eaton operates in nearly 175 countries and has manufacturing facilities worldwide. This enhances the company’s revenue stream but at the same time, exposes it to disruptions like natural disaster, labor strike, war, political unrest, terrorist activity and economic upheaval. Such disturbances could delay shipments, stop production process and result in the cancellation of orders.

Price Performance

Shares of the company have outperformed the industry in the past 12 months.


 

Zacks Rank & Key Picks

Currently, Eaton has a Zacks Rank #3 (Hold). Some better-ranked stocks in the same industry include A O Smith Corporation AOS, Regal Beloit Corporation RBC and SPX FLOW, Inc. FLOW, each currently having a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term (three to five years) earnings growth of A O Smith, Regal Beloit and SPX FLOW is projected at 8%,10% and 4.6%, respectively.

The Zacks Consensus Estimate for 2020 earnings for A O Smith, Regal Beloit and SPX FLO has moved up 2.3%, 8.9% and 4.1%, respectively, in the past 60 days.

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A. O. Smith Corporation (AOS) : Free Stock Analysis Report
 
Regal Beloit Corporation (RBC) : Free Stock Analysis Report
 
Eaton Corporation, PLC (ETN) : Free Stock Analysis Report
 
SPX FLOW, Inc. (FLOW) : Free Stock Analysis Report
 
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Zacks Investment Research