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Arbitration Decision to Impact Eaton's (ETN) Q3 Earnings

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Eaton Corporation plc. (ETN - Free Report) received an order from the arbitration panel to pay $293 million related to claims brought by Pepsi-Cola Metropolitan Bottling Company, Inc. (“Pepsi”), a wholly-owned subsidiary of PepsiCo, Inc. (PEP - Free Report) . This dispute is relating to certain subsidiaries Eaton acquired in the 2012 acquisition of Cooper Industries.

Pepsi claims that it was harmed by a 2011 settlement agreement that resolved litigation Pneumo Abex, LLC had previously brought against various Cooper entities. Pepsi’s contention was that the value contributed to Pneumo Abex and a newly established trust in exchange for a release of the guaranty was substantially below reasonably equivalent value, and that an inability of Pneumo Abex to satisfy future liabilities may result in plaintiffs suing Pepsi under various theories.

Impact of the Award

Eaton expects the impact of the arbitration award to result in an after-tax expense of $205 million in the third quarter 2018, impacting its third-quarter earnings per share by 47 cents.

During second-quarter earnings update, the company projected its third-quarter earnings in the range of $1.35-$1.45 per share. The Zacks Consensus Estimate for the quarter is currently pegged at $1.43 per share.

Since the third quarter guidance did not take into consideration the impact of the arbitration award, it will need to get adjusted accordingly.

However, Eaton intends to challenge the arbitration award on several grounds.

Long-Term Plans of Eaton

Eaton continues to restructure with an objective of improving business and strengthening its margins. Eaton’s end market is improving and the growth initiatives undertaken by the company will help it to grow faster than its market. Courtesy of its ongoing research and development, Eaton continues to churn out new products, aiming to facilitate effective and easy power management.

The company is on course to deliver 11-12% earnings growth over the course of next three years. Eaton continues to generate a stable cash inflow through proficient handling of operating activities. Its strong cash flow generating capability allows it to reward shareholders through regular dividend payment and buyback of shares.

Eaton expects solid market growth to continue for next several years. Since most of its businesses are in early to mid-portion of this economic cycle, the company is going to benefit from the same for a longer period of time.  

Zacks Rank & Key Picks

Eaton currently holds a Zacks Rank #3 (Hold). You can see  the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the same industry are AZZ Inc. (AZZ - Free Report) and ESCO Technologies Inc. (ESE - Free Report)

AZZ sports a Zacks Rank #1 and its fiscal 2019 earnings estimates have moved up 9.4% in the past 60 days to $2.20 per share.

ESCO Technologies carries a Zacks Rank #2 (Buy) and its fiscal 2018 earnings estimates have been revised upward by 1.1% in the past 60 days to $2.68 per share.

All the stocks have surpassed the broader industry’s growth in a year’s time.

 


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