Why Is Eaton (ETN) Up 1.5% Since Last Earnings Report?

A month has gone by since the last earnings report for Eaton (ETN). Shares have added about 1.5% in that time frame, underperforming 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 Corporation’s earnings per share of $1.39 in second-quarter 2018 topped the Zacks Consensus Estimate of $1.32 by 5.3%. The reported earnings exceeded the high end of management’s guided range of $1.25-$1.35. Also, earnings were 20.9% higher than the year-ago figure.    

Revenues

In the quarter, Eaton’s total revenues came in at $5,487 million, surpassing the Zacks Consensus Estimate of $5,466 million by 0.4%. The figure was also 6.9% higher than the year-ago quarter.

The year-over-year sales increase includes 7% growth in organic sales and 1% rise in positive currency translations, which were partially offset by a negative 1% impact of the divestiture of its share in a small electrical JV in 2017 and the formation of the Eaton Cummins JV.

Segment Details

In the second quarter, Electrical Products’ total sales were $1,806 million, up 4.3% from the year-ago quarter. Organic sales were up 3% and currency translation was a positive 1%. The quarter’s operating income was $334 million, up 11.7% year over year.

Electrical Systems and Services’ total sales were $1,513 million, up 7.0% from the year-ago quarter. Organic sales were up 7% and currency translation was a positive 1%. Operating income in the quarter was $227 million, up 17.0% year over year.

Hydraulics total sales were $723 million, up 14.2% from the year-ago quarter. Organic sales were up 13% and currency translation was a positive 1%. The quarter’s operating income was $101 million, up 36.5% year over year.

Aerospace total sales were $463 million, up 5.9% from the year-ago quarter. Organic sales were up 6%. Operating income in the quarter was $90 million, up 11.1% year over year.

Vehicle total sales were $899 million, up 6.4% from the year-ago quarter. Organic sales were up 11%, partially offset by a negative 5% impact as a result of the formation of the Eaton Cummins joint venture in 2017. The quarter’s operating income was $166 million, up 17.7% year over year.

eMobility segment’s total sales were $83 million, up 15.2% from the year-ago quarter. Organic sales were up 14% and currency translation was a positive 1%. Operating income in the quarter was $14 million, up 7.7% year over year.

Quarterly Highlights

Cost of products sold in the reported quarter was $3,671 million, up 6.5% from the prior-year quarter.

Selling and administrative expenses were $901 million, up 1.2% from the year-ago quarter.

In the second quarter, the company’s research and development expenses were $145 million, down 3.3% from $150 million in the prior-year quarter.

Interest expenses of $68 million were up 13.3% from the prior-year quarter.

Order in Electrical Products, Electrical Systems and Services and Aerospace was up 4%, 15% and 18% year over year, respectively.

In the first six months of 2018, the company repurchased shares worth $600 million.

Financial Update

Eaton’s cash and short-term investments were $256 million as of Jun 30, 2018 compared with $561 million on Dec 31, 2017.

As of Jun 30, 2018, long-term debt was $6,753 million, down from $7,167 million on Dec 31, 2017.

Guidance

Third-quarter 2018 earnings per share are expected between $1.35 and $1.45. The company raised its 2018 earnings expectation by 10 cents at both ends and is now expected in the range of $5.20-$5.40 per share for the year.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, Eaton has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Charting a somewhat similar path, 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is primarily suitable for value investors while also being suitable for those looking for momentum and to a lesser degree growth.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. 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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