We're hiking Eaton price target on signs the post-earnings rally to all-time highs has legs

Published Thu, Feb 1 20242:41 PM EST

Eaton shares surged Thursday and hit a new all-time high after the electrical power management company reported an upside fourth quarter and provided a bullish view of 2024. We think the stock can keep climbing as the company rides the reindustrialization wave happening across North America. Revenue increased 11% year over year organically to $5.967 billion, beating analyst expectations of $5.911 billion, according to estimates compiled by LSEG. Adjusted earnings-per-share of $2.55 grew about 24% annually, beating out the consensus forecast of $2.47 a share. Segment margin, similar to an adjusted operating income margin, expanded 200 basis points to 22.8%, a new fourth quarter record for the company that exceeded estimates of 22.6% and was above the high end of guidance. Bottom line This quarter cements our thesis that Eaton is one of the big winners from the megatrends that are driving hundreds of billions of dollars of investment. From electrification and the energy transition to digitalization, infrastructure spending, and reindustrialization, more electrical content is needed everywhere, and Eaton is at the center of it all with its leading products and solutions. On top of the strong results, management painted a bullish view of 2024 and beyond, differentiating itself from many other industrials who gave soft, yet conservative outlooks that couldn't beat the Street. While the macro continues to be murky for many, Eaton has a lot of visibility into growth partly because there has been a significant step up in huge projects happening in North America. According to the company, there has been $933 billion in cumulative megaprojects in North America since January 2021, ranging in all different areas including semiconductor and electric vehicle batteries. Of the 18% that have actually started construction, Eaton has seen a strong win rate of approximately 40% for its electrical equipment. And here's a fact that's so interesting: Of its Electrical Americas revenues in 2023, only 3% were tied to megaprojects. However, megaprojects represent about 16% of its negotiations and 6% of orders, meaning we'll see a bigger tailwind to earnings from these projects in future quarters. The only thing we have negative to say about Eaton — well, not about the company but its stock action — is that we wish there were more pullbacks from the time we started our position in November in the $220s to this quarter so that we could've bought more. We are keeping our 1 rating on the stock but increasing our price target to $290 from $255. Quarterly commentary Not much to pick at here. Electrical Americas achieved all-time record sales, profit, and margins with broad base growth in nearly all its end markets. Electrical Global also achieved record sales and profits as organic growth increased 4% year over year, a nice pickup from the flat third quarter. Management pointed to strength in data center, industrial and commercial, and institutional markets. It's Aerospace business hit an all-time record in sales and fourth-quarter operating profit thanks to strength in defense and commercial aftermarket sales, as well as commercial OEM (original equipment manufacturer, like Boeing). Vehicle segment revenues were flat organic but up 2% on a reported basis, outperforming the end market which was down 5% last year. Margins were higher thanks to an improved price-cost management and also increased efficiency. Less consequential is the small eMobility business, where sales were up nicely but the business lost $16 million due to some program start-up costs. Eaton also continues to build a nice backlog. It's Electrical Americas backlog ended the year up 18% and was up sequentially. Eaton noted strength in the data center market, which has been the focal point of our thesis. Electrical in total currently has a backlog coverage of almost three its times historic average, giving management the confidence in its ability to generate strong growth for several quarters into 2025. In Aerospace, its backlog ended the year up 13% and 3% on a sequential basis. Both book-to-bill ratios are above 1.1, indicating strong growth for the future. Any ratio above 1 is a sign of good demand. Guidance Following a strong year of record results, Eaton's outlook for 2024 suggests this momentum will continue. The company expects organic sales to increase 6.5% to 8.5%, exceeding estimates of about 6.6%, with segment operating margins around 22.4% to 22.8% which beats the consensus of about 22.4% at the low point. Earnings per share are expected to be $9.95 to $10.35, a view that is much higher than the consensus of $9.96. Eaton expects this year to repurchase $1.5 billion to $2.5 billion in stock, and that's a decent figure for a company with a market cap of about $100 billion, One reason why Eaton is able to drive strong margins despite a previously announced $1 investment program to support growth is through its commitment to managing costs. This morning it announced a new $375 million multiyear-restructuring program to reduce some fixed costs and improve efficiencies. By end market, Eaton expects Electricals Americas organic growth of 9% to 11% with operating margins around 26.8% to 27.2%. Electrical Global organic revenue is expected to be up 2.5% to 4.5% with margins of 19.4% to 19.8%. Organic revenue from Aerospace is expected to be 9% to 11%, with margins of 23.3% to 23.7%. Vehicle is expected to be a little with organic sales down 4% to flat with margins at 16.3% to 16.7%, and eMobility is expected to see organic sales increase 25% to 35% but margins of only 1 to 2%. In the first quarter, Eaton expects organic revenue to grow 6% to 8% with operating margins at 21.3% to 21.7%, leading to an adjusted earnings per share view of $2.21 to $2.31. With the consensus estimate into today's print at $2.17, Eaton beat the number even at the low end of its range. (See here for a full list of the stocks in Jim Cramer's Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. 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Eaton Corporation signage at the NYSE

Source: NYSE