On Nov 14, 2016, we issued an updated research report on Eaton Corporation (ETN - Free Report) . Ongoing weakness in its end markets is adversely impacting the company’s bookings while negative currency translation is hurting its prospects. Amid the challenging market conditions, Eaton plans to implement a restructuring program in a bid to reduce fixed structural costs and generate cost savings.
In the third quarter, Eaton managed to beat earnings estimates, although total revenue lagged the mark. The top line was also down on a year-over-year basis due to persistent weakness in the company’s end markets and negative currency translations.
Economic conditions in some of Eaton’s service territories outside the U.S. are yet to stabilize. Since the company generates nearly 50% of its revenues from operations outside the U.S., the ongoing volatility will likely have impact its global revenue generation capability. In fact, for 2016, the company now expects negative foreign exchange impact of nearly $225 million on earnings.
Note that Eaton already expects weaker conditions in some of its markets to continue in the second half of 2016, with organic revenues projected to decline 4% in the year, reflecting a prolonged sluggish conditions in the end markets. The market uncertainty is expected to continue in 2017 as well, with margins suffering the impact of higher pension and interest expenses.
However, Eaton continues to generate a stable cash inflow through proficient handling of operating activities. In the third quarter of 2016, the company’s operating cash flow was $798 million and it was on course to generate operating cash flow of $2.6 billion to $2.8 billion in 2016.
In addition, to cope with the challenging environment, the company plans to implement a restructuring program which will lower its fixed structural costs and generate cost savings.
Zacks Rank & Key Picks
Eaton currently has a Zacks Rank #5 (Strong Sell). Some better-ranked stocks in the same space include EnerSys (ENS - Free Report) , II-VI Incorporated (IIVI - Free Report) and AO Smith Corp. (AOS - Free Report) . EnerSys currently sports a Zacks Rank #1 (Strong Buy), while both II-VI Incorporated and AO Smith carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
EnerSys, II-VI Incorporated and AO Smith Corp. have each surpassed earnings estimates by a respective 6.48%, 52.17% and 4.44% in the last reported quarter.
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