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Why Is Eaton (ETN) Up 1.7% Since Last Earnings Report?

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Zacks Equity Research
·5 min read
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A month has gone by since the last earnings report for Eaton (ETN). Shares have added about 1.7% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Eaton due for a pullback? 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 Q1 Earnings Beat Estimates, Revenues Miss

Eaton Corporation reported first-quarter 2020 earnings of $1.09 per share, which surpassed the Zacks Consensus Estimate of $1.06 by 2.8%. However, the reported earnings fell short of management’s guided range of $1.16-$1.26 per share. The company’s earnings were negatively impacted by 14 cents due to the COVID-19 pandemic impact.

GAAP earnings in the reported quarter were $1.07 per share compared with $1.23 in the year-ago period. The difference between GAAP and operating earnings in the reported quarter was due to a one-time charge of 2 cents associated with acquisitions and divestitures.

Revenues

Total revenues in the quarter came in at $4,789 million, lagging the Zacks Consensus Estimate of $4,793 million by 0.1%. Quarterly revenues also decreased 9.7% from the year-ago quarter.

At the start of the year, organic sales were expected to be down 3%. The COVID-19 pandemic reduced its sales by an additional 4% in the first quarter. This 7% total fall in organic sales resulted in the year-over-year revenue decline.

Segment Details

Electrical Americas
’ total first-quarter sales were $1,788 million, down 8.8% from the year-ago level. The decline was due to the impact of the divestiture of the Lighting business, negative currency translation and reduced organic sales.

Electrical Global’s total sales were $1,144 million, down 7.9% from the year-ago quarter. Organic sales were down 6% from the year-ago quarter, primarily due to the COVID-19 outbreak. Negative currency translation impacted sales by 3%, while the acquisition of Ulusoy added 1% to sales.

Hydraulics’ total sales were $507 million, down 16.2% from the year-ago quarter. The revenue decline was due to 14% fall in organic sales and a 2% impact from negative currency translation.

Aerospace total sales were $680 million, up 12.6% from the year-ago quarter. The acquisition of Souriau-Sunbank contributed 14% to revenues but organic sales was down 1% from a year ago.

Vehicle total sales were $598 million, down 26.2% from the year-ago quarter. Decline in organic sales, divestiture of the automotive fluid conveyance business and negative currency translation affected the results.

eMobility segment’s total sales were $72 million, down 13.2% from the year-ago quarter. The drop in the top line was due to decline in organic sales and negative currency translation.

Highlights of the Release

Eaton continues to make changes in its portfolio. The company sold the Lighting business for $1.4 billion and entered into an agreement to sell the Hydraulics Business for $3.3 billion by 2020-end.

Selling and administrative expenses were $865 million, down 5.7% from the year-ago quarter. The company’s research and development expenses in the first quarter were $153 million, down 1.% from the prior-year period. Interest expenses in the quarter were $34 million, down 43.3% from the year-ago period.

Orders in Electrical Americas were up 3% year over year, while the same in Electrical Global, Hydraulics and Aerospace were down 1%, 11% and 1%, respectively.

Financial Update

In the first quarter, it repurchased shares worth $1.3 billion, which equates to 3.4% shares outstanding of Eaton at the beginning of 2020.

Eaton’s cash was $239 million as of Mar 31, 2020 compared with $370 million on Dec 31, 2019.

As of Mar 31, 2020, long-term debt of the company was $7,842 million, up from $7,819 million on Dec 31, 2019.

Guidance

Amid the novel coronavirus-led economic crisis and destruction of demand, the company has decided to withdraw its 2020 earnings guidance. Eaton expects free cash flow in the range of $2.3-$2.7 billion in 2020.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -37.29% due to these changes.

VGM Scores

At this time, Eaton has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. 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 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 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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