Eaton (ETN) Up 8.1% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Eaton (ETN). Shares have added about 8.1% in that time frame, outperforming 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 the most recent earnings report in order to get a better handle on the important drivers.

Eaton's Q2 Earnings and Revenues Surpass Estimates

Eaton Corporation reported second-quarter 2020 earnings of 70 cents per share, which surpassed the Zacks Consensus Estimate of 52 cents by 34.6%. However, earnings were down 54.2% year over year due to weakness in some of its end markets. GAAP earnings in the reported quarter were 13 cents per share compared with $1.50 in the year-ago period. The difference between GAAP and operating earnings in the reported quarter was due to a one-time charge of 20 cents associated with acquisitions and divestitures, as well as 37 cents related to a multi-year restructuring program.

Revenues

Total quarterly revenues came in at $3,856 million, which beat the Zacks Consensus Estimate of $3,653 million by 5.6%. However, total revenues decreased 30.3% from the year-ago quarter. In the reported quarter, organic sales were down 22% from the prior-year period. Divestiture of the Lighting and Automotive Fluid Conveyance businesses resulted in an 8% decline in revenues, and negative currency translation impacted the same by 2%. Acquired assets added 2% to second-quarter sales.

Segment Details

Electrical Americas’ total second-quarter sales were $1,490 million, down 28.5% from the year-ago level. The decline was due to the impact of the Lighting business divestiture, negative currency translation and reduced organic sales.

Electrical Global’s total sales were $1,111 million, down 16.1% from the year-ago quarter. Organic sales were down 14% from the year-ago quarter, primarily due to the COVID-19 outbreak. Negative currency translation impacted sales by 2%.

Hydraulics’ total sales were $411 million, down 31.8% from the year-ago quarter. The revenue decline was due to 30% fall in organic sales and a 2% impact from negative currency translation.

Aerospace total sales were $461 million, down 27.3% from the year-ago quarter. The acquisition of Souriau-Sunbank contributed 8% to revenues. However, organic sales were down 27% from a year ago.

Vehicle total sales were $327 million, down 59.3% from the year-ago quarter. Decline in organic sales, divestiture of the automotive fluid conveyance business and negative currency translation affected the results.

eMobility segment’s total sales were $56 million, down 33% from the year-ago quarter. The deterioration in the top line was due to a decline in organic sales.

Highlights of the Release

Eaton continues to make changes in its portfolio. The company sold the Lighting business for $1.4 billion and entered into an agreement to sell the Hydraulics Business for $3.3 billion by 2020-end.

Selling and administrative expenses were $691 million, down 23.8% from the year-ago quarter. The company’s second-quarter research and development expenses were $126 million, down 16.6% from the prior-year period. Interest expenses for the quarter were $38 million, down 24% from the year-ago period.

Orders in Electrical Americas were up 2.1% year over year, while the same in Electrical Global, Hydraulics and Aerospace was down 4.6%, 33.7% and 12.8%, respectively. Despite the novel coronavirus-related challenges early in the quarter, orders registered an impressive growth in June, with the residential and utility end markets witnessing the maximum improvement.

The company decided to implement a multi-year restructuring program that will cost nearly $280 million. Total second-quarter expenses of $187 million were incurred by Eaton.

Financial Update

Eaton’s cash was $292 million as of Jun 30, 2020 compared with $370 million on Dec 31, 2019. As of Jun 30, 2020, long-term debt of the company was $6,906 million, down from $7,819 million on Dec 31, 2019.

Guidance

Amid the novel coronavirus-led economic crisis and destruction of demand, the company decided to withdraw its 2020 earnings guidance. Eaton expects free cash flow in the range of $2.3-$2.7 billion for 2020. It is targeting share buyback in the range of $1.7-$1.9 billion in 2020, of which $1.3 billion is already completed in first-quarter 2020.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 15.43% due to these changes.

VGM Scores

At this time, Eaton has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the top 40% 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 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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