Eaton (ETN) Down 4.1% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Eaton (NYSE:ETN). Shares have lost about 4.1% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Eaton due for a breakout? 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 drivers.

Eaton's Earnings and Revenues Miss Estimates in Q4

Eaton Corporation reported fourth-quarter 2019 earnings of $1.37 per share, which lagged the Zacks Consensus Estimate of $1.40 by 2.1%. The reported earnings were at the lower end of management’s guided range of $1.36-$1.46 per share.

During the fourth quarter, the company recorded a pre-tax charge of $50 associated with warranty costs in the Vehicle business segment. The costs were being incurred to correct the performance of a product that incorporated a defective part from a supplier.

GAAP earnings in the reported quarter were $1.09 per share compared with $1.46 in the year-ago period. The difference between GAAP and operating earnings in the reported quarter was due to a one-time charge of 28 cents associated with acquisition and divestiture transaction.

Revenues

Total revenues in the quarter came in at $5,238 million, lagging the Zacks Consensus Estimate of $5,328 million by 1.7%. Quarterly revenues also decreased 4% from the year-ago quarter.

The year-over-year decline in revenues was due to 4% fall in organic sales and negative currency translation of 0.5%. These negatives were partially offset by a 0.5% gain from acquired assets.

Segment Details

Electrical Products’ total fourth-quarter sales were $1,753 million, down 2% from the year-ago level.

Electrical Systems and Services’ total sales were $1,669 million, up 4% from the year-ago quarter. Organic sales were also up 2% from the year-ago quarter. The acquisition of Ulusoy and Innovative Switchgear added 2% to its sales.

Hydraulics’ total sales were $565 million, down 13% from the year-ago quarter. Revenues declined due to continued weakness in the global mobile equipment market, and destocking at both OEMs and distributors.

Aerospace total sales were $512 million, up 3% from the year-ago quarter due to 2% organic sales growth and 1% contribution from the acquisition of Souriau-Sunbank.

Vehicle total sales were $664 million, down 19% from the year-ago quarter, owing to 18% decline in organic sales and 1% negative currency translation.

eMobility segment’s total sales were $75 million, down 6% from the year-ago quarter. The drop in the top line was entirely due to decline in organic sales.

Highlights of the Release

Eaton continues to make changes in its portfolio. The company sold the Automotive Fluid Conveyance business and signed an agreement to sell the Lighting business. It also acquired three businesses in 2019, which were in sync with the long-term growth strategy.

Segment margins in the reported quarter were 17.8%, up 40 basis points (bps) from the year-ago level.

Cost of products sold in the reported quarter was $3,556 million, down 3.1% from the year-ago figure. Selling and administrative expenses were $874 million, down 0.6% from the year-ago quarter.

The company’s research and development expenses in 2019 were $606 million, up 3.8% from the prior-year period. Interest expenses in 2019 were $236 million, down 12.9% from 2018 levels.

Orders in Electrical Systems and Services, and Aerospace were up 2.5% and 6% year over year, respectively. On the contrary, Hydraulics’ orders and Electrical Products (excluding Lighting) were down 11% and 2% year over year, respectively, due to weakness in the global mobile equipment market.

Share repurchases in 2019 totaled $1.0 billion, representing 3% of shares outstanding at the beginning of the year.

Financial Update

Eaton’s cash was $370 million as of Dec 31, 2019 compared with $283 million in the corresponding period of 2018.

As of Dec 31, 2019, long-term debt of the company was $7,819 million, up from $6,768 million in the comparable period of 2018.



Guidance

First-quarter 2020 earnings per share are expected between $1.16 and $1.26, indicating a 4% decline at the midpoint from first-quarter 2019 earnings.

The company expects 2020 earnings within $5.60-$5.90 per share, flat year over year at the midpoint, excluding 2019 vehicle warranty costs. Segment operating margin for 2020 is expected within 17.8-18.2%.

Eaton has plans to repurchase shares worth $2.4-$2.8 billion in 2020. Acquired assets are expected to add 2% to total revenues in 2020, while divested assets are likely to have a 7.5% negative impact on the same.

The company expects organic revenues for 2020 between down 1% and up 1%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -6.41% due to these changes.

VGM Scores

Currently, Eaton has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile 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.