Eaton Corporation Goes On Break Out Watch

Key Points

• Eaton Corporation reported a robust quarter supported by secular megatrends. 
• The company reported record results in all operating segments. 
• The stock is on track to reach all-time high prices and pays 2% in dividend yield. 

Can Eaton Corporation NYSE: ETN hit a new high in 2023? It could. The company just released an earnings report that shows above-consensus demand and a growing backlog which would support growth, margin expansion and capital returns. While inflation and rising rates are impacting some parts of the economy, there are secular trends to support Eaton.

Among them is the shift to electrification and digitization, which are only expected to gain momentum in the coming years. What this means for Eaton and its investors is a record-setting business, and that should equate to record-setting share prices. 

"We’re encouraged by strong operational performance as we start the year with record earnings per share and segment margins. Strong backlog growth, particularly in Electrical and Aerospace, points to ongoing demand across our markets. We're confident in our ability to capitalize on growth drivers – including the effects of re-industrialization in North America and the megatrends of electrification, energy transition and digitalization – to deliver on our targets,” said Craig Arnold, Eaton chairman and chief executive officer.

Eaton Has Robust Quarter, Raises Guidance 

Eaton had a robust quarter, producing revenue of $5.48 billion to set a company record. The revenue strength was driven by record-setting revenue in all operating segments, and it beat the Marketbeat.com consensus by 480 basis points. Organically, the company grew by 15%, but FX shaved 200 bps off the top line. On a segment basis, Electrical Americas led with a gain of 21%, followed by 17% growth in eMobility, 12 growth in Aerospace, 10% growth in Vehicles and 4% growth in Global Electrical. 

The margin news is also impressive. The company improved its segment margin by 90 basis points and set a record. This led to significant cash flow and free cash flow improvements, which are up about 1000 basis points compared to last year (cash flow) and reversed a loss compared to last year (free cash flow). The earnings are also at record levels; the adjusted EPS is up 16% compared to last year, and it beat the consensus by a dime leading to an improvement in guidance. 

Eaton raised its guidance for revenue and earnings based on the Q1 strength and a 39% increase in backlog. The company raised the full-year outlook for revenue growth by 200 basis points to 9% to 11%, with EPS ranging from $8.30 to $8.50 and above the $8.28 consensus target. Q2 is also expected to be strong, with earnings bracketing the consensus with the midpoint at the bottom of the range. These figures may underestimate the FY potential if momentum carries into the current and subsequent quarters. 

Analysts And Institutions Are Buying Eaton Corporation 

The analysts' activity has been mixed over the past 3 months, and there have been no new reports since the Q1 release, but the sell-side is supporting the stock. The sentiment is pegged at a weak Moderate Buy with a price target that assumes fair value at current levels.

The latest activity includes price target increases and decreases in a range surrounding the consensus, so no real change was made. If the analysts like the Q1 results and outlook enough, they may raise their price targets, if not the ratings, and help push the stock to new high prices. Regarding the institutions, they own about 80% of the company and have been buying on balance for the last few quarters. 

The stock is up 2% following the release and extending a rally that began in the middle of 2022. The move has the market on track to retest all-time highs soon with a chance of breaking out. The critical level is $178.75; a sustained rally may form if the market moves above there. If not, this market will remain range bound at current levels until later in the year.