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Why Eaton Stock Rose 11% in January

Reuben Gregg Brewer, The Motley Fool

What happened

Shares of power-management company Eaton (NYSE: ETN) rose 11% in January, according to data provided by S&P Global Market Intelligence. That increase, however, was hardly evenly distributed. In fact, almost all of the gain took place in just the last few days of the month -- leading up to the company's release of 2018 earnings results.

So what

At the end of 2018, investors fell into a very dour mood, concerned that economic growth was slowing. That had a chilling effect on the entire stock market, and it would be a notable headwind to cyclical industrial names like Eaton. Which is one of the reasons why the stock fell nearly 11% in December. However, as the new year got underway, the market's mood shifted in a positive direction. Stocks across the board started to head higher. Eaton's stock was tracking along with the market but started to move sharply higher as industrial peers began releasing earnings results that were, on the whole, fairly strong.

Two men looking at blueprints with an industrial work floor behind them.

Image source: Getty Images.

Although Eaton wasn't scheduled to report earnings until the last day of the month, investors had already started to bake in strong results. The company didn't disappoint. Fourth-quarter earnings were up 13% year over year, excluding the impact of U.S. tax law changes, with organic sales growth of 7%. Full-year 2018 earnings were up 16%, excluding one-time items, helped along by a 100-basis-point margin improvement. Simply put, it was a good year.

More important, however, is that Eaton provided an upbeat view of 2019. At this point, management expects organic sales growth of 4% to 5%. Add in further margin expansion, and the company is projecting roughly 9% earnings growth for the full year. And while management noted in the fourth-quarter conference call that every sector in which it operates wasn't expected to do well in 2019, it didn't, at this point in time, see any across-the-board weakness that would suggest a broad economic downturn was imminent.

Now what

Business seems to be going pretty well for Eaton today. Moreover, management currently thinks that business will remain bright through 2019. The stock price advance in January is basically a reflection of these facts coupled with improving investor sentiment. Still, investors shouldn't ignore the fact that Eaton is a cyclical industrial company. There will come a time when the company's results falter along with the global economy. In other words, enjoy the good news and the stock jump, but don't get too complacent. The current economic expansion is on the long side.

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Reuben Gregg Brewer owns shares of Eaton. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.