Eaton Looks Homeward
Industrial equipment maker Eaton (NYS: ETN) recently posted strong first-quarter numbers that didn't disappoint analysts. The results have once again proved that the company's wide geographical reach and the diversity of its business divisions -- electrical, hydraulics, aerospace, trucking, and automotive -- give it the much-needed strength to survive the presently uncertain business environment.
Eaton generated revenue of $3.96 billion, a mere 4% increase as compared to the previous year, as its sales were hurt by slowing demand in China and an extended recession in Europe. On the other hand, the company's profits surged 8% from the previous year to $311 million. Barring the impact of acquisition costs, this translates into earnings of $0.92 per share, which comfortably beat Street expectations of $0.90 per share.
Eaton's diversified products are sold in more than 150 countries. This also makes it evident that any economic weakness in Asian and European markets has a direct bearing on the company's top line, causing a medium-term threat in the process. As Eaton pointed out in its previous quarter, demand for the electronics segment is slipping in China as the country's economy experiences a slowdown. In fact, the problem was amplified by the weakness in Europe, leading to a 9% decline in Eaton's non-U.S.-based revenue from its electrical business. Yet Eaton has raised its full-year earnings outlook for the second time this year.
What is it that makes Eaton so confident? Let's find out.
Growth at home
The answer lies in the company's home market, which seems to have rebounded in a major way. Eaton's biggest business -- the U.S. electrical market -- witnessed an almost 11% growth in revenue, largely due to improved non-residential construction and new orders from the oil and gas industry. In fact, the company now expects the U.S. market to grow at a rate of 9% as opposed to 6% estimated earlier. This is a welcome contrast to the trend prevailing over the past four to five years in which international markets outpaced the U.S. in terms of growth. Eaton plans to cash in on the home market rebound to offset the softness prevailing elsewhere.
Eaton is not alone as it faces a reversal in geographical sales dynamics. Industrial goods maker Honeywell (NYS: HON) also raised its annual profit guidance despite a sluggish European market, as it expects strength in its U.S. business operations. Peer Danaher (NYS: DHR) was hit by flat sales in China as well and is now mainly banking on the U.S. market for its growth.
The Foolish bottom line
Eaton looks strong enough to withstand headwinds in the form of weak economic conditions in Europe and China, as the U.S. market for hydraulics, non-residential construction, and trucking improves. Despite predicting the international economic sluggishness to continue for a large part of this year, the company has raised its operating earnings forecast for 2012 to an average of $4.50 per share, a healthy sign for investors. I would certainly keep an eye open for Eaton and if you're thinking on similar lines, don't forget to add Eaton to your Watchlist and stay updated on this stock. Click here. It's completely free!
Earnings season is here in full force and earnings reports are a great peek into how a business is performing, as well as how it might deliver over several years. Make sure to check out our free report "5 Stocks Investors Need to Watch This Earnings Season."
At the time this article was published Navjot Kaur does not own shares of any of the companies mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.