For all of the worries about another slowdown in the economy, many industrial conglomerates are reporting solid growth in calendar second quarter results. Eaton (NYSE:ETN) is clearly among them. What is interesting, though, is the extent to which this growth has been bulwarked by the emerging markets - a circumstance that is tiding over many of these companies in lieu of a stronger domestic market.

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Solid Second Quarter Results
For the Q2, Eaton reported that revenue grew more than 21%. Stripping out acquisitions, foreign currency and the like, organic growth was more on the order of 14%. Unusual for many industrial companies, Eaton management also provides its opinion on end market growth, and it believes its end markets grew 12% in the quarter - suggesting some meaningful share growth for the company.

Among Eaton's diverse business units, none posted reported growth below 10% (aerospace was the laggard at just over 10%). Eaton's truck and hydraulics units led the way in terms of reported growth (37% and 28%, respectively), while the electrical business is still far and away the largest unit.

Despite all the talk of higher steel prices and other input cost inflation (to say nothing of forex movements), gross margin improved 70 basis points in the Q2. Segment profits increased more than 38%, while reported operating profit jumped nearly 49%. The truck, hydraulics and auto businesses were notable margin improvers this quarter, while aerospace and ex-U.S. electrical lost some leverage.

Heavy-Duty Growth, Especially in EM
Even with lower bookings of solar inverters in Europe, the electrical business has been pretty solid. Companies like ABB (NYSE:ABB) and Siemens (NYSE:SI) have been reporting better sales and orders, as well as other comparables like Emerson (NYSE:EMR) and Honeywell (NYSE:HON).

Heavy-duty equipment seems to be where business is still really strong, though. While Caterpiller (NYSE:CAT) and Terex (NYSE:TEX) rattled the Street with their profits, there was little to fault in the strong revenue growth. Likewise, CNH (NYSE:CNH) reported solid results, and expectations have been heading higher for Deere (NYSE:DE). On-the-road trucks are also strong, as confirmed by Cummins (NYSE:CMI), and although the NAFTA and European markets aren't blowing the doors off, demand in regions like India is very good.

Speaking of India, emerging markets seem to be providing a lot of the fuel for these international industrial conglomerates. U.S. results aren't terrible, but the growth here at home is nothing like what it is in China, India, Brazil and so on. This could be a good double-dip opportunity for Eaton. The company has historically derived more of its revenue from North America than other industrials like Caterpillar, Cummins or Illinois Tool Works (NYSE:ITW), but the company is seeing a two-for-one in stronger overseas growth and a stronger percentage of revenue from overseas.

The Bottom Line
Eaton has been an active acquirer, but most of the deals have been modest in size. It is worth wondering, though, if Eaton would ponder a larger deal in the hydraulics or filtration space. A company like Pall (NYSE:PLL), for instance, would be an interesting opportunity - though it would be a very large commitment for Eaton and perhaps more than management wants to swallow right now.

With aerospace picking up and only residential real estate really struggling, Eaton is looking at some very healthy overseas markets. The company is shaping up as a major "woulda coulda shoulda" for me, though perhaps not on the scale of Cummins or Siemens. With plenty of growth still possible and relatively reasonable expectations in the stock, it should have decent upside. It is not a slam-dunk for new money, but it would be worth considering this stock if there is another slide due to fears over the health of the economies in North America and Europe. (For additional reading, see The Ups And Downs Of Investing In Cyclical Stocks.)

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Tickers in this Article: ETN, SI, EMR, HON, CAT, CMI, PLL, ITW, DE, ABB, TEX, CNH

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