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Bear of the Day: Eaton (ETN)

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Eaton Corporation (ETN - Free Report) has slipped to a Zacks #5 Rank (Strong Sell) after another round of downward EPS estimate revisions. The analyst moves came after a disappointing Q3 report where operating earnings per share of $1.15 were a penny higher than the Zacks consensus but Eaton’s total revenue came in at $4.99 billion, lagging the consensus of $5.05 billion by 1.2%.

On a year-over-year basis, revenues were down nearly 4% due to lower Aerospace (2.9%), Vehicle (12.4%), Electrical Systems and Services (3.4%), and Hydraulics (6.1%) sales.

Unfavorable currency translation and a decline in organic sales were the primary reasons for the revenue decline. Sales took a 1% hit from currency translation, while the drop in organic sales accounted for 3%.

In response, analysts took down this year's full year estimates from $4.27 to $4.21 and 2017 profit projections from $4.56 to $4.36 in the past week.

Quarterly Highlights

Cost of products sold in the reported quarter was $3,371 million, down 6.3% from the prior-year period.

Selling and administrative expenses decreased 5.9% to $853 million from $907 million a year ago.

In the third quarter of 2016, the company’s research and development expenses were $146 million, down 6.4% from $156 million in the prior-year quarter.

Interest expenses of $59 million were in line with the prior-year quarter figure.

Eaton is on track with its restructuring program, which is expected to deliver $200 million of incremental profit in 2016 over the 2015 levels.

Financial Update

Eaton’s cash and short-term investments were $494 million as of Sep 30, 2016, compared with $268 million as of Dec 31, 2015.

As of Sep 30, 2016, long-term debt was $7,881 million, compared with $7,746 million as of Dec 31, 2015.

Eaton repurchased shares worth $243 million during the third quarter.


Fourth-quarter 2016 earnings per share are expected to be between $1.05 and $1.15.

For 2016, Eaton still anticipates organic revenues to decline 4%, reflecting persistently sluggish markets around the world. Currency translation is projected to have a roughly $225 million impact during the year.

Eaton narrowed its 2016 operating earnings guidance to the range of $4.15 to $4.25 per share from its prior expectation of $4.20–$4.40.

The company anticipates fourth-quarter 2016 and 2017 bookings continue to being soft due to the company’s cost control initiatives for 2017, which now targets savings of $180 million, up from its prior expectation of $130 million.

Thus, there is concern among analysts about the continuing decline in bookings in Eaton’s business segments. Bookings at the Electrical Systems and Services, and the Hydraulics segments were down 5% and 3% respectively, year over year. Bookings in Electrical Products were also down 1%. However, Aerospace segment bookings were up 15%.

Management projects a 4% decline in organic revenues in 2016.

Until the estimates turn back up, it may be time to stay on the sidelines with this industrial stalwart. The Zacks Rank will let you know when it's safe again.

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