Eaton Settles Meritor Litigation, Hits 52-Week High - Analyst Blog

Eaton Corporation plc ETN and Meritor Inc. MTOR signed an agreement to settle the anti-trust lawsuit filed in 2006. Per the agreement, Eaton Corp. will pay $500 million to ZF Meritor LLC to settle all claims, which could have exceeded $2 billion if it went into trial.

The Anti-trust Litigation

In 2006, ZF Meritor LLC, a joint venture between a Meritor, Inc. subsidiary and ZF Friedrichshafen AG, and Meritor Transmission Corporation filed an anti-trust lawsuit against Eaton. In 2009, the jury found Eaton to be guilty of engaging in anticompetitive operations in the sale and marketing of heavy-duty truck transmissions.

The out-of-court settlement will finally close the anti-trust lawsuit, which was scheduled to go into trial from Monday. This will avoid a costly as well as lengthy legal process.

Another Settlement Last Week

Eaton and Triupmh Group, Inc. TGI settled a lawsuit last week, which was filed in 2004. Eaton decided to pay $147.5 million as part of the settlement. Other settlement terms were kept confidential between the two parties.  The agreement resolved all litigation between Eaton and Triumph pending in Mississippi and North Carolina.

Market Reaction

Eaton's ability to settle the ZF Meritor LLC claim at a much lower price was well received by its investors, propelling the share price to hit a 52-week high of $79.65 yesterday. The back-to-back settlements have evoked a positive market reaction with Eaton shares gaining 4% in the last four trading sessions to close finally at $79.24.

Road Ahead for Eaton

The Eaton management will now be able to concentrate on expanding its business with the legal challenges behind them.  

This diversified power management company is a steady performer having surpassed the Zacks Consensus Estimate in the last two quarters.  We believe Eaton's portfolio of assets will help it to achieve its 2014 pro forma earnings guidance in the range of $4.50 to $4.90 per share.

Zacks Rank

Eaton Corporation currently holds a Zacks Rank #3 (Hold). Investors interested in the electrical machinery industry may consider EnerSys ENS, which sports a Zacks Rank #1 (Strong Buy).

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