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Why Is Eaton (ETN) Down 7.7% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Eaton (ETN). Shares have lost about 7.7% 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 Q1 Earnings Beat Estimates, 2019 Guidance Up

Eaton Corporation reported first-quarter 2019 earnings of $1.26 per share, which surpassed the Zacks Consensus Estimate of $1.25 by 0.8%. The reported earnings were at the higher end of management’s guided range of $1.18-$1.28 per share. Moreover, the bottom line marked a 14.5% improvement from the year-ago level.    

Revenues

Total revenues in the quarter came in at $5,305 million, lagging the Zacks Consensus Estimate of $5,397 million by 1.7%.

However, quarterly revenues were 1.1% higher than the year-ago quarter.  The year-over-year revenue increase, which includes 4% organic sales growth, was partially offset by a 3% negative impact from currency translation.

Segment Details

Electrical Products’ total first-quarter sales were $1,760 million, up 2% from the year-ago level. Organic sales, up 5% from the prior-year quarter, were negatively impacted by 3% due to currency translation. Operating income was $332 million, up 8% year over year.

Electrical Systems and Services’ total sales were $1,464 million, up 6% from the year-ago quarter. Organic sales, up 8% from the year-ago quarter, were negatively impacted by 2% due to currency translation. Operating income in the quarter was $192 million, up 15% year over year.

Hydraulics total sales were $686 million, down 3% from the year-ago quarter. Organic sales, up 1% from a year ago, were negatively impacted by 4% due to currency translation. Operating income in the quarter was $80 million, down 11% year over year.

Aerospace total sales were $502 million, up 10% from the year-ago quarter due to 11% organic sales growth. Additionally, operating income in the quarter was $116 million, up 30% year over year.

Vehicle total sales were $810 million, down 9% from the year-ago quarter, owing to a decline in organic sales and negative currency translation. Moreover, operating income in the quarter was $122 million, down 8% year over year.

eMobility segment’s total sales were $83 million, up 8% from the year-ago quarter. Organic sales, up 9% from the prior-year level, were negatively impacted by 1% due to currency translation. Operating income in the quarter was $5 million, down 55% year over year, primarily due to higher spending on research and development activities.

Quarterly Highlights

Segment margins in the reported quarter were 16%, up 80 basis points from the year-ago level. Cost of products sold in the reported quarter was $3,573 million, in line with the year-ago figure. Selling and administrative expenses were $917 million, up 3.1% from the year-ago quarter. The company’s research and development expenses in the first quarter were $156 million, in line with the prior-year period. Interest expenses of $66 million were down 5.7% from the prior-year quarter.

Orders in Electrical Products, Electrical Systems and Services, and Aerospace were up 4%, 8% and 18% year over year, respectively. On the contrary, Hydraulics’ orders were down 11% year over year due to weakness in the global mobile equipment market.

The company repurchased shares worth $150 million in the reported quarter and raised its quarterly dividend by 8%.

Financial Update

Eaton’s cash & cash equivalents were $303 million as of Mar 31, 2019 compared with $283 million on Dec 31, 2018. As of Mar 31, 2019, long-term debt of the company was $6,782 million, up marginally from $6,768 million on Dec 31, 2018.

Guidance

Second-quarter 2019 earnings per share are expected between $1.45 and $1.55. The company expects 2019 earnings within $5.72-$6.02, up from the prior range of $5.70-$6.00 per share, with organic growth expectation of 4%. Segment operating margin for 2019 is expected within 17.1-17.5%, up from the prior guided range of 17-17.4%.

Eaton has plans to repurchase shares worth $400 million in 2019.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

At this time, Eaton has a strong Growth Score of A, a grade with the same score on the momentum front. Charting a somewhat similar path, 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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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