Eaton Earnings: Strength in Electric Americas From Investment Spending Propels Higher Valuation

Narrow-moat-rated Eaton ETN once again had a great quarter. We lift our fair value estimate to $195 from $176. Most of the increase is due to management’s revised 2023 earnings outlook (which we mostly agree with), with the incremental benefits coming nearly evenly from both our updated long-term targets and time value of money. Consolidated revenue rose to $5.87 billion, or 13% organically, while segment operating margins increased 150 basis points to 21.5%, during the quarter.

Except for the electrical Americas segment, results were in line with expectations. That segment saw sales rise a resounding 19% organically, and segment operating margins expand 310 basis-points to 26.4% during the quarter. Management seems to keep sandbagging expectations in this one business, leading to the consistent overall beat and raise in recent quarters. Consequently, we’ve reassessed the long-term trajectory of this business, and subsequently added several hundred million dollars’ worth of revenue per year, well above the targets provided in Eaton’s most recent investor day. For context, in the final year of our model’s explicit forecast, we’re expecting about $600 million of incremental electrical sector-related revenue.

Eaton is certainly not the only electrical supply chain manufacturer that hasn’t reassessed their targets in light of the investment dollars from both the U.S. Infrastructure Investment and Jobs Act and the Inflation Reduction Act. For instance, narrow-moat-rated Hubbell has also undersold their benefits, particularly with the IIJA. However, Eaton’s reluctance to publicly commit to new targets perplexes us, particularly given recent acknowledgement in investor conferences that their targets warrant a second look. Even the guide implies a sequential stepdown in the electrical Americas segment that seems like a stretch given all the positive tailwinds that should benefit the company.