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A Slimmer, Trimmer Eaton For The Downturn

May 01, 2020 9:58 AM ETEaton Corporation plc (ETN)ABBNY, SBGSY6 Comments
Stephen Simpson profile picture
Stephen Simpson


  • Eaton's 7% organic revenue decline in the first quarter may be on the lower end of the average, but outsized exposure to vehicles and hydraulics also explains it.
  • Eaton has a relatively attractive business mix for the recovery, with opportunities in data centers, building retrofits, and industrial electrification offsetting longer-cycle exposures.
  • These shares have continued to outperform peers, making Eaton more of a "borderline" buy call, but definitely a name to keep in mind if the markets pull back again.

Eaton’s (NYSE:ETN) management has been busy – selling the largely disliked (at least by the Street) lighting and hydraulics businesses, buying an aircraft connectors business, and reprioritizing around long-term drivers like electrification (including smart grid, automation, and electric vehicles) and air travel growth. None of that immunizes Eaton to the current downturn, but it does give Eaton a less-cyclical, higher-margin business to take into the recovery.

Eaton has continued to outperform, and I can’t say the shares are dramatically undervalued. They are, however, priced pretty well in the context of quality industrials, and in my mind they’re sitting right on that “buy/hold-and-buy-more-on-a-pullback” line. With opportunities to bulk up the electrification, EV, and aerospace businesses even further through M&A, this is a company I still like in the multi-industrial space.

An In-Line Quarter

More than a few industrials have reported noticeably better revenue and margin results relative to recently-lowered expectations, but Eaton was pretty much right on target. Call it a relative disappoint if you like, but I’d say it not really a thesis-changing situation.

Revenue declined 7% in organic terms, with management commenting that the underlying organic contraction would have been around 3% without the impact of Covid-19. The electrical businesses did alright on a comparable basis, with the Americas business down 2% and the Global business down 6% (compared to a 7% decline at ABB (ABB), a 3% decline at Hubbell (HUBB), and a 6% decline at Schneider (OTCPK:SBGSY)). Aero declined 1%, while Vehicle declined 12% and eMobility declined 12%. Hydraulics, where the sale to Danfoss has not closed, saw a 14% decline.

Gross margin declined 150bp, which was okay relative to expectations, but I’m a little surprised that American industrials haven’t seen more tailwind from raw material cost reductions (relative to European companies). Segment income declined 11%, coming right in line with expectations

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.

Analyst’s Disclosure: I am/we are long ABB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (6)

Guraaf profile picture
Thanks for the article. I hold both $ETN and $DOV. I have $EMR but been frustrated with them for last 5-7 years. Hasn't gone anywhere really.

Just curious, why do you like $ABB and hold it?
Stephen Simpson profile picture
Mostly because there are some very high-quality businesses within ABB and I've long thought that if they got the right management, they could produce a lot of value. It's been a long, frustrating wait.
Guraaf profile picture
Thanks @Stephen Simpson, CFA. That makes sense. I will try to buy some industrials if they come down 10-20% individually. I am generally partial to:


Would like to hear if I should leave something out and rather add another 2-3 names to my watchlist/buylist. Thanks much.
Stephen Simpson profile picture
I don't really know enough about LMT or RTX to comment. You may want to look at ITT and CMCO.
Added some more ETN earlier this year. Now just sitting on what I've got.

Retired dividend-growth investor
Mooneym20j profile picture
Don’t forget the pent up demand for golf grips!
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