Eaton Earnings: Infrastructure Spending and Energy Transition Power Electrical Supercycle

After reviewing narrow-moat-rated Eaton’s ETN first-quarter results, we’ve lifted our fair value estimate by 7% to $176 per share. The company is performing exceptionally well, pacing ahead of our expectations and its own medium-term targets. Even after revising our estimates, we think there’s some noticeable conservatism in parts of management’s guidance (though there’s also some optimism, like operating margin aspirations for the eMobility segment, which rarely seems to consistently break even).

We think conservatism is readily apparent in Eaton’s electrical business, both on a near- and long-term basis. In fact, we consider the company’s medium-term organic growth and segment operating margin targets in its electrical business outdated at this juncture. Management seemed to acknowledge this by pointing out that secular trends like energy transition and infrastructure spending have altered the long-term growth algorithm of the company. Eaton has gone from simply selling components to offering comprehensive electrical solutions at scale.

The company’s electrical sector backlog is up 39% to $8.9 billion, while its aerospace backlog is up 27% to $3 billion. Rolling 12-month orders are up 12% in the electrical businesses and 21% in the aerospace segment. In the electrical Americas segment alone, its negotiated pipeline has doubled to $4.8 billion since 2019.

During the first quarter, consolidated revenue rose to $5.48 billion, or about 15% on a year-over-year organic basis. Consolidated segment operating profit margin rose nearly 100 basis points to 19.7%, while adjusted earnings per share grew to $1.88, or 16% year over year, well above guidance.