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Eaton Misses Overall - Analyst Blog

Posted
11/1/2012 12:20:00 PM
By: Zacks.com
Referenced Stocks:ETN;PH

Industrial manufacturer Eaton Corporation ( ETN ) released its third quarter results with earnings per share of $1.07 barely falling behind the year-ago figure of $1.08 per share. The quarterly bottom-line also lagged the Zacks Consensus Estimate of $1.09 per share.

Eaton's GAAP earnings during the third quarter were $1.02 per share versus $1.07 per share reported in the year-ago quarter. The difference between GAAP and operating earnings of 5 cents during the quarter was due to acquisition integration charges.

Total Revenue

Eaton posted net quarterly revenue of $3,950 million, down 4.2% from $4,123 million in the year-ago quarter. The year-over-year results were impacted by dull sales from the company's truck and Electrical Rest of the World businesses as well as unfavorable foreign exchange rate.

Quarterly revenue was also lower than the Zacks Consensus Estimate of $4,195 million.

Segment Analysis

Electrical Americas: Within its Electrical unit, Electrical Americas' sales increased 6% year over year to $1,143 million, while operating profit (excluding acquisition integration charges) jumped 31% to $208 million. This was driven by end market growth of 4%, partially offset by a 3% decline in bookings, compared with the prior-year quarter.

Electrical Rest of the World: The Electrical Rest of the World segment's sales decreased 9% year over year to $686 million. Operating income of $77 million (excluding acquisition integration charges) went up 24% from the year-ago level. Segment bookings for the quarter observed a sharp 3% drop compounded by a 3% and 6% fall in core sales and foreign currency, respectively.

Hydraulics: At $763 million, Hydraulics segment sales notched up 6% over the prior year, while operating profit came in at $98 million, down 11% from the year-earlier quarter. The domestic Hydraulics market performed favorably on the back of a 13% increase from acquisitions, partially countered by a decline of 4% and 3% in core sales and foreign currency, respectively. Global Hydraulics witnessed a slowdown in growth due to lower capital spending on construction equipment units in the U.S. and China.

Aerospace: Segmental sales of $419 million were flat with the year-ago result while operating profit declined 31% to $49 million year over year. However, the overall market grew by 4% compared to third quarter 2011. Aerospace booking in the third quarter fell 7% on account of weak defense aerospace market.

Truck: The Truck segment recorded a decline of 23% resulting in sales of $549 million. It brought in operating income of $103 million during the quarter, down 26% from the year-ago quarter. An 8% decline in truck production was responsible for this shortfall.

Automotive: The segment's third quarter sales declined 12% year over year to $390 million. It posted an operating profit of $41 million, dropping 34% from the comparable quarter last year due to considerable fall in European automotive production.

Operating Results

The cost of product sold in the third quarter 2012 was $2,747 million, declining 5.2% from $ 2,900 million in the year-ago quarter.

Selling and administrative expenses climbed to $687 million from $668 million in the prior year.

Operating profit fell by 12.9% year over year to $376 million from $432 million in the year-ago quarter.

Financial Update

Cash and short-term investments of the company as of September 30, 2012 were $1,045 million versus $1,084 million as of December 31, 2011.

Long-term debt was $3,690 million as of September 30, 2012 compared with $3,366 million as of December 31, 2011.

Guidance

The company expects the Electrical Americas to improve 6% in 2012 while the Electrical Rest of the World will continue to decline by 3%.

Also, the company expects that Global Hydraulics will fall by 2% in 2012 which indicates a 5% drop from the previous projection due to continued weakening in the U.S. and Chinese economies. The Aerospace market is expected to grow by 4% while Eaton expects Class 8 truck production to total 270,000 units in 2012.

Peer Update

The company competes with Parker-Hannifin Corporation ( PH ). Parker-Hannifin announced its first-quarter 2013 financial results with earnings of $1.57 per share below the Zacks Consensus Estimate of $1.73. Earnings for the quarter declined by 34 cents year over year.

Total revenue was $3.21 billion, down from $3.23 billion in the prior-year quarter.

Our View

Eaton posted lackluster financial outcomes in the third quarter, as against its successful earnings performance in the preceding two quarters. Uncertainty surrounding U.S. fiscal reforms has led to a deceleration in the industrial sector which is expected to continue into the following quarters. This will hit Eaton's growth rate hard.

Also, markets in Europe and China will remain dull adding to the company's concerns. However, significant acquisitions like Cooper, Rolec Comercial e Industrial S.A. in Chile and South Korea's Jeil are expected to serve as positive growth catalysts in the future.

Cleveland, Ohio-based diversified power management company Eaton Corporation is a leading supplier of power accessories in the aerospace industry and has customers spanning 150 countries. Eaton Corporation currently retains a Zacks #4 Rank (short-term Sell rating).



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