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Eaton (ETN) Benefits from Improvement in its End Market

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Eaton Corporation (ETN - Free Report) managed to beat first-quarter earnings and total revenue estimates, thanks to growth in organic sales. The gradual improvement in Eaton’s end-market conditions and benefits from restructuring activities will drive its performance. However, negative currency translation is expected to have an adverse impact on the company’s results, as was the case last year.

Eaton expects end market conditions to improve and projects organic growth in the range of 1%–3% in 2017. The company started its restructuring program to cope with the challenging environment, which aims to lower fixed structural costs and entail cost savings.

Given the positive return from the restructuring activities, the company will continue the same in the improving market conditions. Eaton has plans to invest $440 million in restructuring program during the 2015–2018 period, which is expected to create a cumulative benefit of $518 million.

The company continues to be a cash flow generator, which enables it to continue with share buybacks and dividend payment. Eaton aims to buyback $750 million shares in 2017 out of which $255 million has been repurchased in first quarter. Eaton also raised its quarterly dividend by 5% to 60 cents in first quarter.

Eaton operates in nearly 175 countries and has manufacturing facilities worldwide. This definitely enhances the revenue stream of the company but at the same time exposes it to disruptions like natural disaster, labor strike, war, political unrest, terrorist activity and economic upheaval.

Eaton generates nearly 50% of its revenues from operations outside the U.S. and Economic conditions in some of the countries outside the U.S. in which Eaton has a presence are yet to stabilize, which is a headwind. In addition, the stronger U.S. dollar compared to other currencies has resulted in a greater-than-expected negative currency translation. The company now expects negative foreign exchange impact of nearly $150 million on 2017 earnings.

Price Movement

In the last twelve months, Eaton has outperformed the Zacks categorized Manufacturing- Electronics industry. During this period, company’s shares gained 24.1%, compared with the industry’s gain of 20.2%.



Eaton’s extensive market reach, consistent cash flow generation, excellent restructuring initiatives and prudent product innovation are going to drive its performance.

Other Stocks to Consider

Eaton currently has a Zacks Rank#2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other well ranked stocks in the same industry are UQM Technologies, sporting a Zacks Rank #1, while Regal Beloit Corporation (RBC - Free Report) and Enersys (ENS - Free Report) both currently share the same rank as Eaton

Regal Beloit Corporation reported a positive earnings surprise of 11.46% in first quarter and its 2017 Zacks Consensus Estimate moved up by 1.5% in last 90 days.

Enersys reported a positive earnings surprise of 5.79% in first quarter and its 2017 Zacks Consensus Estimate moved up by 3.3% in last 90 days.

UQM Technologies, reported first quarter loss of 3 cents which was narrower than Zacks Consensus Estimate of a loss of 4 cents.

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