Eaton Corporation (NYSE:ETN) Is A Buy On Restructuring News

Eaton Corporation Prepares For Economic Rebound

Eaton Corporation (NYSE:ETN) was not immune to the pandemic. The company is a maker of electrical components for business, industry, and residential use, and its markets were hit hard. But that doesn’t mean it isn’t a buy. The Eaton Corporation was well-positioned to weather the storm and now working hard to come out of the crisis in better shape than before.

What Eaton has going for it is this: he balance sheet is still in good shape, the outlook for business is robust, the dividend is still safe, and the company just announced a major restructuring. The bottom line, with the economic rebound looking as strong as it does, Eaton Corporation is getting ready to grow and the stock is on the verge of breaking out.

"We anticipate that several of our markets will take some time to recover, and so we have decided to implement a multi-year restructuring program to deal with that weakness," said CEO Craig Arnold. "The cost of the program is estimated to be $280M, including the $187M charge we took in the second quarter. The principal end markets affected are commercial aerospace, oil and gas, NAFTA Class 8 trucks, and North American/European light vehicles. These actions are targeted at structural costs that will enable Eaton to deliver even stronger results when the markets recover."

Eaton Corporation Beats On The Top And Bottom Line

Eaton Corporation didn’t have a great quarter in the calendar 2nd but there is a lot of good in the report. On the top line, revenue fell by 30.2% from the last year but it came in ahead of expectations by 540 basis points. That’s good news not only for the 2nd quarter but for future quarters as well. If demand was stronger than expected during the worst of the pandemic what will it look like as economies reopen? The worst-hit segment by geography, Electrical Americas, saw revenue fall more than 30% but the economic rebound in that area is strong. The Leading Indicators are sitting at multi-year highs, durable goods orders have been robust, and demand for housing is accelerating.

On the bottom-line, GAAP EPS fell short of consensus but there is a mitigating factor to be aware of. While GAAP EPS missed by $0.37 adjusted EPS beat by $0.17. More importantly, the adjustment is for one-time charges associated with the company’s restructuring. Charges in the 2nd quarter totaled $187 million or just over 66% of the expected cost. When completed, sometime in calendar 2023, the company expects $200 million in annual savings. So, earnings missed but due to the pre-payment of costs related to a value-creating restructuring. Not bad at all.

Eaton Corporation’s Dividend Is Safe And Growing

At face value Eaton’s dividend is a little high relative to earnings, the payout ratio is about 75%, but once again there are mitigating factors to be aware of. The first is that the 75% payout ratio is based on this year’s earnings. When looking to the next year the ratio falls to 60% and neither of those figures includes the possibility earnings will beat or the impact of restructuring. The second is the balance sheet. The company’s cash hoard is a little low but debt and debt obligations are even lower. Coverage is running about 25X and there is ample free-cash-flow so no threat to the payment.

The Technical Outlook: Eaton Corporation Is On The Verge Of A Breakout

The Eaton Corporation price action has shares trading just under the pre-COVID highs and on the verge of a major breakout. Price action over the past week or so has formed what looks like a bullish flag/triangle pattern and that means the rally may only be just starting. The indicators are a little weak but set to fire a bullish signal as price action moves higher. The risk is in the resistance. If the price can’t get above the $104 level and stay there we may be in for a pull-back before prices move significantly higher. If price action can move above $104 and stay there the next target is near $115.