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Why Is Eaton (ETN) Up 6.8% Since Last Earnings Report?

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It has been about a month since the last earnings report for Eaton (ETN - Free Report) . Shares have added about 6.8% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Eaton due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Eaton Lags Q3 Earnings Estimates, Narrows Guidance

Eaton Corporation reported earnings per share of $1.43 in third-quarter 2018, which lagged the Zacks Consensus Estimate of $1.44 by a penny. The reported earnings were at the high end of management’s guided range of $1.35-$1.45. Moreover, the bottom line was 14.4% higher than the year-ago figure.    

Revenues

In the quarter, Eaton’s total revenues came in at $5,412 million, lagging the Zacks Consensus Estimate of $5,489 million by 1.4%.  However, total revenues were 3.8% higher than the year-ago quarter.

The year-over-year revenue increase includes 6% organic sales growth, and was partially offset by a 1% negative impact from currency translation and the divestiture of its share in a small electrical joint venture (JV) in 2017, along with the formation of the Eaton Cummins JV.

Segment Details

In the third quarter, Electrical Products’ total sales were $1,789 million, up 0.2% from the year-ago quarter. Organic sales were up 3% while currency translation negatively impacted the same by 1%. The quarter’s operating income was $343 million, up 4% year over year.

Electrical Systems and Services’ total sales were $1,519 million, up 6.9% from the year-ago quarter. Organic sales were up 9% but currency translation negatively impacted the same by 1%. Operating income in the quarter was $234 million, up 19.4% year over year.

Hydraulics total sales were $670 million, up 6% from the year-ago quarter. Organic sales were up 7% but currency translation had a 1% negative impact on the same. The quarter’s operating income was $94 million, up 18% year over year.

Aerospace total sales were $478 million, up 9% from the year-ago quarter. Organic sales were up 9%. Operating income in the quarter was $105 million, up 25% year over year.

Vehicle total sales were $876 million, up 2% from the year-ago quarter. Organic sales were up 7%, partially offset by a negative 2% impact as a result of the formation of the Eaton Cummins JV in 2017 and 3% from negative currency translation. The quarter’s operating income was $166 million, up 10.7% year over year.

eMobility segment’s total sales were $80 million, up 7% from the year-ago quarter. Also, organic sales were up 7%. However, operating income in the quarter was $10 million, down 38% year over year, primarily due to higher spending on research and development activities.

Quarterly Highlights

Cost of products sold in the reported quarter was $3,597 million, up 3.8% from the prior-year quarter.

Selling and administrative expenses were $889 million, down 1.4% from the year-ago quarter.

In the third quarter, the company’s research and development expenses were $138 million, down 6.1% from $147 million in the prior-year quarter.

Interest expenses of $67 million were up 11.7% from the prior-year quarter.

Orders in Electrical Products, Electrical Systems and Services, Hydraulics and Aerospace were up 3%, 4%, 4% and 12% year over year, respectively.

Financial Update

Eaton’s cash & cash equivalents were $327 million as of Sep 30, 2018 compared with $561 million on Dec 31, 2017.

As of Sep 30, 2018, long-term debt of the company was $6,737 million, down from $7,167 million on Dec 31, 2017.

Guidance

Fourth-quarter 2018 earnings per share are expected between $1.38 and $1.48.

The company raised its 2018 earnings expectation by 10 cents, estimated at the lower end of the guided range, to the range of $5.30-$5.40 per share from earlier projection of $5.20-$5.40.

Eaton has plans to repurchase shares worth $800 million to $1 billion in 2018.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Eaton has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Eaton has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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