Following Eaton Corporation’s (ETN) robust third quarter 2010 earnings results on October 20, 2010, analyst sentiments on the stock were definitely positive. Company-wide end-market growth along with increased bookings drove Eaton’s outperformance during the September quarter.
Earnings Review
Eaton Corporation earnings per share, excluding acquisition-related integration charges, came in at $1.60, beating the Zacks Consensus Estimate of $1.38 and exceeded the company’s guidance range of $1.25 – $1.35. In the year-ago period, the Cleveland, Ohio-based company earned $1.21 per share.
Total quarterly revenues of $3.6 billion exceeded the Zacks Consensus Estimate of $3.4 billion and were up 18% year over year. Improved sales in the quarter primarily came from organic growth and continued expansion in the company’s markets around the world, offset slightly by unfavorable foreign exchange rates.
Eaton witnessed robust sales growth across all its business segments during the third quarter. Overall, the company’s end-markets grew 14% in the quarter.
We have discussed the quarterly results at length here: Eaton Outdoes Estimates
Agreement of Analysts
The overall trend in annual estimates leans on the positive side, with 1 out of 2 upside revisions for fiscal 2010 in the last 7 days. In the last 30 days too, only 1 analyst raised estimates. There were no downward revisions in the last 7 or 30 days.
For 2011, 6 (out of 22) analysts moved up their estimates in the last 7 days, while none of them lowered estimates. Over the 30-day period also there were 2 upward revisions versus no downward revisions.
Magnitude of Estimate Revisions
Though only one analyst boosted estimates for 2010 in the last 7 and 30 days, estimates rose 36 cents and 40 cents, respectively, in both periods. Based on the number of estimate revisions over the last 7 days, estimates for 2011 were up by 3 cents. Over the one-month period, estimate revisions point to an 11-cent increase in the 2011 estimates.
Upgrade to Outperform
Eaton has gradually transformed itself from an automotive and truck component manufacturer into a diversified industrial enterprise with lead positions in its core electrical, hydraulic and aerospace market segments.
Eaton has grown through strategic acquisitions and joint ventures, which either complement or expand its businesses. In the past, Eaton acquired the remaining 50% of Micro Innovation Holding AG and entered into a joint venture to manufacture low voltage switchboards and control panel assemblies for use in the Middle East power generation and industrial markets.
The joint venture operates through SEG Middle East Power Solutions & Switchboard Manufacture LLC. More recently, the company acquired EMC Engineers, Wright Line and CopperLogic adding high-value products and engineering services to its existing capabilities. These acquisitions are expected to augment top-line growth and earnings, along with strong operating cash flows.
During the third quarter of 2010, the company witnessed strong growth in its end-markets, which recorded a 14% growth. Going forward, the company expects this trend to continue, as late-cycle businesses begin to rebound. Eaton expects its overall end-markets in 2010 to grow 10% driven by higher growth in non-U.S. markets.
Also, bookings across the company’s business segments showed substantial growth, with greater strength at Electrical, Hydraulic and Aerospace.
Forecasts suggest end-markets for the Electrical Rest of World segment would grow 7% in 2010, while Hydraulic, Truck and Automotive segments would grow 31%, 26% and 24%, respectively. However, end-markets at the Electrical Americas and Aerospace segments are expected to witness declines of 1% each in 2010. In all, we expect the strong momentum across Eaton’s business segments to continue amidst buoyant end-market demand and market share gains.
Given the company’s robust performance in the third quarter and positive end-market outlook for 2010, we upgrade our recommendation for Eaton shares to Outperform, supported by the company’s Zacks #1 Rank (Strong Buy).
EATON CORP (ETN): Free Stock Analysis Report
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