Strong Markets Lift Eaton Corp. - Analyst Blog

Eaton Corporation (ETN) reported fourth quarter and full-year 2010 results. Eaton's fourth quarter earnings per share grew 25% year over year, mainly upon a 13% end-market growth.

Earnings per share, excluding acquisition-related integration charges, came in at $1.69 in the quarter, beating the Zacks Consensus Estimate of $1.67 and exceeded the company's guidance range of $1.50 - $1.60. In the year-ago period, the Cleveland, Ohio-based company earned $1.35 per share.

For full-year 2010, earnings per share were $5.61, which outperformed the Zacks Consensus Estimate of $5.57 by 4 cents. The company's earnings also grew 117% from $2.59 earned in 2009.

Operating Results

Total quarterly revenue of $3.7 billion exceeded the Zacks Consensus Estimate of $3.6 billion and was up 17% year over year, mainly on a 16% growth in core sales and 2% growth from acquisitions, offset slightly by a 1% decline due to foreign exchange.

Eaton's full year revenue reached $13.7 billion, which was above the Zacks Consensus Estimate of $13.3 billion and showed a 16% growth from 2009 levels. Improved 2010 sales primarily came on the back of a rebound in the depressed market levels of 2009 and a 30% growth in revenues from developing countries.

Eaton witnessed robust sales growth across all its business segments during both the fourth quarter and fiscal 2010.

Segment operating margin in the quarter was at an all-time high of 13.7%, 30 basis points above the margin of 13.4 % recorded in the third quarter of 2010.

Segment Analysis

Electrical Americas: Within its Electrical unit, Electrical Americas revenues improved 22% from the year-ago quarter to $1.0 billion, while operating profit was up 29% to $163 million. Growth in Electrical Americas revenues in the quarter reflected a 9% growth in end-markets and 14% growth in order bookings. The company's industrial controls and power quality markets showed robust growth during the quarter.

Electrical Rest of the World: Electrical Rest of the World segment sales were up 10% to $768 million. Operating income of $94 million (excluding acquisition integration charges) was up 27% from the year-ago level. Segment bookings (adjusted for foreign exchange and acquisitions) and end-markets grew 10% each during the quarter.

Hydraulic: At $571 million, Hydraulic segment sales rose 36% year-over-year, while operating profit (excluding acquisition integration charges) came in at $73 million, up from $13 million in the corresponding quarter last year. Hydraulics markets in the quarter grew 38%, with U.S. markets up 46% and non-U.S. markets up 32%. Bookings at quarter-end increased 41% for the Hydraulics segment.

Aerospace: Compared to the fourth quarter of 2009, the Aerospace segment sales and operating profit posted growth rates of 5% and 28%, respectively, reflecting a 1% increase in the Aerospace markets. Bookings in the quarter were up 36% for this segment.

Truck: The Truck segment posted a 17% improvement in sales to $518 million. It earned operating income of $66 million during the quarter, an increase of 29% from the year-ago quarter. Eaton benefited from a 16% increase in truck markets, with U.S. markets up 20% and non-U.S. markets up 14%.

Automotive: Helped by a 9% year-over-year growth in the automotive unit production, the segment's fourth quarter sales also grew 9% to $394 million. It posted an operating profit of $43 million, an increase of 34% from last year.

Guidance

Eaton expects continued growth in its end-markets in 2011. The company has guided an 8% end-market growth for the entire 2011, with expectations to outgrow its end-markets by roughly $450 million. The company said that it expects to register growth at end-markets for all its segments.

In all, Eaton expects to raise 2011 revenue roughly 12% above the 2010 levels. The company also expects its operating earnings for 2011 to set a new record.

For the first quarter of 2011, Eaton estimates adjusted earnings in the range of $1.50 - $1.60 per share. Full-year 2011 adjusted earnings are guided in the $7.00 - $7.60 per share range. Full-year net and adjusted earnings are now guided at $5.30 - $5.40 and $5.45 - $5.55 per share, respectively.

Given its outperformance in 2010 and a robust outlook for 2011, Eaton announced a 17% rise in its quarterly dividend. The company also took pleasure in announcing a two-for-one stock split based on the handsome 60% growth in its stock price during 2010. The company pointed out that its 2011 earnings guidance has incorporated the impact of the said split.

Our View

Based in Cleveland, Ohio, Eaton Corporation has consistently outperformed estimates in the past four quarters. Based on the company's aim to record 8% growth at its end-markets, we expect the company to continue to outperform estimates even in 2011.

Eaton Corporation currently retains a Zacks #2 Rank (short-term Buy rating). The company fares better than its peer ITT Corporation (ITT) which carries a short term Zacks #3 Rank (Hold). We maintain our long-term Outperform rating on the stock.

 
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