Eaton Corp. Plc (NYSE: ETN, $122.74): “Must Be What They’re ETN: Why Shares Grew During the Pandemic”
By: Thomas Washington, AIM Student at Marquette University
Disclosure: The AIM 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.
· Eaton Corp. Plc (NYSE: ETN) is a diversified power management company that provides energy-efficient solutions for electrical, hydraulic, and mechanical power. ETN’s operations are segmented into Electrical Products, Electrical Systems and Services, Hydraulics, Aerospace, Vehicle and eMobility which operate within the United States and Internationally.
· Strategic direction to become an intelligent power management company through utilization of macro trends including, IoT, energy transition, electrification, and blended power.
· Target’s within planning horizon include $3B of free cashflow, 2-3% organic growth, 8-9% EPS growth, and 20% segment margins.
· In 2019 ETN launched a share buyback program to repurchase $1.9B of stock.
· ETN announced a $280M multi-year restructuring program to gain efficiencies and reduce its cost structure in response to declining market conditions.
Key Points: The $280M restructuring program includes $187M in Q2 2020 in order to reduce structural costs in markets that will have slower recovery from the pandemic. Poor market conditions brought about by the Covid-19 pandemic were the deciding factor in ETN’s decision to implement a multiyear restructuring program. Additional expected restructuring charges through 2022 are $93M including charges of $33M $55M and $5M in 2020, 2021, and 2022 respectively. The program is set to be fully implemented by 2023 at which point it is expected to yield $200M in mature year savings.
During 2019 and 2020 ETN was completed seven transactions regarding the acquisition or disposition of related companies in order to support efforts to become a more nuanced power management company. The inorganic growth strategy implemented by ETN has positioned the company nicely to enjoy growth in organic revenue in the near future. Pandemic related obstacles had a negative impact on ETN’s organic revenue, but the company managed to increase organic revenues during the year with Q3 2020 organic revenue being down 9% YTD but having increased 16% from the previous quarter.
The share repurchase program the company adopted in 2019 determined that shares were to be repurchased with market conditions, market price, and capital level all taken into account. 2020 market conditions positioned ETN nicely in order to execute 2019 program with $177M of shares being bought back in Q3 2020. Q3 repurchases brought ETN’s YTD repurchase total to $1.5B, still $400M below the programs target.
What has the stock done lately?
ETN shares have enjoyed 31.82% increase in price over the last 12 months, a very hopeful sign amid current market conditions. This level of growth in valuation is impressive no matter the year, but in the context of the last 12 months this level of growth is even more remarkable. The stock is reletavely volatile with a 52 week range of $56.41 - 120.34, but appears to be well positioned to create value in the wake of the pandemic.
Past Year Performance: ETN beat Q3 revenue forecasts by 7.5% with revenue reaching $4.5B. Earnings per share came in at $1.11, approximatly 5% above analyst predictions. Share repurchase programs indicate strong cash flow and will likely boost EPS.
Boasting YTD price growth of 31.82%, ETN has significiantly increased shareholder value and appears to be on track to generate returns for the next several years. The restructuring plan ETN implemented this year will give it a leg up in the post pandemic world as it will cut costs find efficiencies in the aspects of operations that were most effected by the pandemic.