Power Play: Investors Are Drawn to Well-Diversified Eaton
By Peter Pham, AlphaVN Securities
Eaton Corporation (NYSE: ETN) is a power management company that provides energy-efficient solutions that help clients effectively manage electrical, hydraulic, and mechanical power. Eaton's latest quarter was quite impressive, with the company posting good revenue growth, outpacing the industry average of 10.4%. Earnings per share have also improved, although they're expected to slow some in the next quarter.
Despite the impressive numbers, Eaton trimmed its outlook for 2013 primarily due to the NAFTA Class 8 truck market and the persistent weakness in the hydraulics markets. Investors, however, maintain their upbeat outlook on this company, clearly looking at the long-term potential of Eaton. The sunnier outlook of investors is helping shares gain more than 4% on the earnings day. Investors are looking at Eaton's 3% organic growth and its 7% increase in bookings. These numbers -- along with management's positive outlook on the end market, raising the forecast from flat to up 3% to 4% in 2014 -- may have boosted investors' confidence to a level that made the lower outlook for 2013 seem like a passing affair.
Strong Financials Despite Weak Fourth-Quarter Estimates
Net sales reached an all-time high of $5.61 billion, 42% above the $3.95 billion during the same period last year. Attributable net income surged significantly to $510 million or $1.07 per diluted share from $345 million or $1.02 per share in the corresponding quarter of 2012. Eaton performed better in the third quarter on the back of the acquisition of Cooper Industries (NYSE: CBE).
Management has stated that they expect the fourth quarter to be quite low compared to the third, with earnings per share estimated to stay in the $1.00 to $1.10 range. Eaton is hoping for a full-year average earnings per share to be in the $4.05 to $5.15 range, which is a reduction from its previous projection of $4.25.
Strength in Diversity
Eaton is reaping the benefits of its massive global presence. Since the company has a strong foothold in many economies, 175 to be exact, any risk occurring in a particular region is offset by another region. The profit or revenue of the company is not dependent upon just a couple of markets or economies. The highly diversified company is also benefiting from recent acquisitions, a trend likely to continue into the coming quarter.
In fiscal 2014, the company expects 3% to 4% growth in its market, getting a significant boost from the electrical and hydraulic system sectors, which were impressively profitable in the third quarter. Europe and the United States are gradually moving into a growth zone, which will only serve to benefit the company. Along with those two regions, Latin America and Asia are also showing promising growth opportunities in these sectors.
Eaton recently declared a quarterly dividend of $0.42 per share, or $1.68 annualized, payable on November 22, 2013, to stockholders on record as of November 4, 2013. This sizable dividend is a very attractive lure to investors looking to get into this sector with a reasonably priced stock.
Rivals ITT Corp (NYSE: ITT) and Johnson Controls Inc (NYSE: JCI), are doing marginally better than Eaton in terms of earnings; however, when it comes to being investor-friendly, Eaton leads the pack. For the third quarter, ITT reported a 21% rise in earnings and 15.8% rise in revenues while Johnson posted a record 23% rise in adjusted earnings and 6% jump in revenues. However, in terms of yield, Eaton is well ahead of these two. ITT Corp pays an annualized dividend of 0.4 with 0.97% as yield while Johnson has a dividend of 0.88 with a yield of 1.74%.
Though Eaton expects a slightly weaker fourth quarter, investors are rating the stock higher, which can be seen in the share performance of the company. Year to date shares have gained 53.73% and seen a quarterly gain of 12.18%, which is quite impressive. It is apparent that Eaton is benefiting from its diversified business model and acquisitions of other companies, which are expected to continue in the future, as well. Simple moving averages also reflect a positive trend in the company with the stock trading 3.08% above 20-days SMA, 5.02% above 50-days SMA, and 12.52% above 200-days SMA.
Overall, Eaton Corporation looks poised to grow, and will offer increased value to shareholders, as the company has a five-year average dividend rate of 3.10% with a payout ratio of 49.00%. Long term, Eaton looks like a great option for investors looking to hold on to a stock for a while and get a nice dividend payout every year. My bet is that Eaton's performance will continue to impress investors and exceed analysts expectations.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga.
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