Eaton
Corp. Plc (ETN, $145.71): “The (electrical) Power of Eaton”
By: Zach
Turbett, AIM Student at Marquette University
Disclosure:
The AIM International Equity Fund currently holds this position. This article
was written by myself, and it expresses my own opinions. I am not receiving
compensation for it, and I have no business relationship with any company whose
stock is mentioned in this article.
Summary
- Eaton Corp. Plc (NYSE:ETN) provides
energy-efficient solutions for electrical, hydraulic, and mechanical
power. The company operates in four different segments: Electrical
Americas and Electrical Global, Aerospace, Vehicle, and eMobility. Eaton
operates internationally with the majority of sales based in the United
States.
- With
the sale of Eaton’s hydraulic business, it has allowed the company to
continue to heighten and expand in their current segments.
- In
Q1 of 2022, Eaton acquired Royal Power Solutions for $600 million. Royal
Power Solutions is a manufacturer of electrical connectivity components
used in electric vehicle, energy management, industrial and mobility
markets.
- The
company announced the addition of two key executives which will go into effect
July 5th, 2022. Heath Monesmitch will be named President and
Chief Operating Officer of the Electrical Sector where he will be
responsible for the EMEA region. Additionally, Paulo Ruiz will be the
President and Chief Operating Officer of the Industrial Sector. Both
additions will add great value to the company in the future.
- Eaton
has experienced substantial financial growth in a challenging environment
in Fiscal 2021 in relation to the Covid-19 pandemic, inflation, and supply
chain constraints.
Key
points: Late last year, Eaton completed the
sale of its hydraulic business to Danfoss (a danish industrial company) for
$3.3 billion. The hydraulic business was seen as a large but
slower-growth, lower margin business than the rest of the company. With the
sale of the hydraulic business, it marks as another milestone for the company’s
transformation into a higher growth company. Additionally, this sale will
provide great value for its shareholders as it earns higher returns.
Eaton completed a very recent
acquisition of Royal Power Solutions which will synergize well with its already
existing electrical segment. With Eaton’s continued commitment to improve
quality of life through power management technologies, this will allow the
company to excel. Also, this acquisition will give them the ability to
capitalize on their fast-growing eMobility, Aerospace, and electrical
businesses.
In the past year, the world has
experienced major setbacks due to the pandemic, supply chain constraints, and
rising inflation. Throughout this period, ETN has continued to show financial
strength. For FY 21’, sales were up $19.6 billion dollars, representing 10%
organic growth. In fact, all segment margins were up 18.9% which was an all-time
record for the company. Additionally, the company continued to reinvest in the
already growing company with $575 million going towards Capex and $616 million
towards R&D activities. Lastly, Eaton returned $1.2 billion to their
investors through dividends, and through this same period, their share price
grew 44%.
What
has the stock done lately?
As of late, the stock has seen
increased volatility since the beginning of this year. At the beginning of this
year, ETN’s share price was $170.56, and today it sits at $145.71, representing
a decrease of 14.5%. This decline in price is partly due to the current
geo-political tension between Russia and Ukraine, and ongoing supply chain
constraints.
Past
Year Performance:
ETN’s 52-week range stretches from $139.12-175.72, with its
low trailing back to mid-June of last year. Today, the share price is hovering
very close to its price of that a year ago. In August of 2021, ETN saw a slight
dip from $168.84 to $148.39 due to the CEO’s press conferencing speaking on the
supply chain issues. He explained that the company will have challenges when
respect to their revenue. However, the share price quickly bounced back in the
following months hitting its all-time high. The company will be releasing its
Q1 2022 earnings on May 3rd.
1 Year Stock Chart vs. Benchmark from FactSet here
My
Takeaway
ETN was added to the portfolio at
the end of 2018 and has seen extraordinary growth since then. Although the
company has seen many macro-economic challenges, ETN has stayed strong and has
continued to push forward. Also the company has continued to be a pioneer in
power solutions with its high M&A activity, key customer wins, and many
development programs. Moreover, ETN is joined Bill Gates’ Breakthrough Energy
Ventures and the UK-based Business Growth Fund in providing venture capital
support to Reactive Technologies. The company still faces headwinds with the
ongoing supply chain crisis in which they will need to effectively manage. With
the company’s strong performance prior to the war between Russia and Ukraine,
there is no doubt that Eaton will be a strong performer in the industry and
compared to its peers.
1 Month Stock Chart from FactSet here
