Eaton Corporation (ETN) is expected to release its third quarter 2012 results on October 31, 2012. The Zacks Consensus Estimate for the third quarter of 2012 is $1.09 per share (year-over-year increase of 2.31%) on revenues of $4,195 million (year-over-year increase of 1.75%).

Second-quarter 2012, a Synopsis

Industrial manufacturer Eaton Corporation released its second quarter results with earnings per share of $1.15 beating the year-ago quarter figure of 97 cents per share. Earnings were ahead of the Zacks Consensus Estimate of $1.09 per share.

Eaton's GAAP earnings during the second quarter were $1.12 per share versus 97 cents per share reported in the year-ago quarter. The difference between GAAP and operating earnings of 3 cents during the reported quarter was due to acquisition integration charges.

In the second quarter 2012, Eaton earned net quarterly revenue of $4.07 billion, which was marginally lower than the year-ago performance of $4.09 billion. The year-over-year results were impacted by lower-than-expected end market growth and an unfavorable foreign exchange rate, which were marginally offset by growth in core sales and positive contribution from the acquired assets.

Quarterly revenue was also lower than the Zacks Consensus Estimate of $4.2 billion.

Read our full coverage on this earnings report: Mixed Performance from Eaton

Guidance for 2012

Eaton expects its 2012 pro forma and GAAP earnings to be in the range of $4.20 - $4.50 per share and $4.09 -$4.39 per share, respectively. Pro forma earnings estimates exclude acquisition integration charges.

After registering a strong performance in the first half of the year, the company expects the Electrical Americas market to improve 8% in 2012, up from the earlier projection of 6%. Electrical Rest of the World registered soft results in the first half of 2012 and the company expects a 3% year-over-year decline in the business in 2012. The company expects  the global hydraulics business to grow at a 3% rate in 2012, lower than the previous expectation due to delay in recovery in the Chinese markets.
    
Zacks Consensus                   

The analysts covered by Zacks expects Eaton to post third-quarter 2012 earnings of $1.09 per share, higher than $1.07 delivered in the prior-year quarter. Currently, the Zacks Consensus Estimate ranges between earnings of $1.01 and $1.27 a share.

For 2012, the Zacks Consensus Estimate stood at $4.25 per share, significantly up from its prior-year earnings of $3.96 per share. The current Zacks Estimate ranges between $4.10 and $4.40 per share.

Estimate Revisions Trend

Agreement

We see a declining trend for estimates for the third quarter of 2012. Among the 15 estimates, none of the estimates moved in the upward direction over the last 30 days. None moved in the opposite direction over the last 7 days, whereas 5 moved down over the last 30 days.

Similarly for full-year 2012, among the 14 estimates, none of the estimates moved in the upward direction over the last 30 days. None moved in the opposite direction over the last 7 days, while 6 moved downwards in the last 30 days.

The analysts seem to be negative for third quarter as well as full year 2012.

Magnitude

The Zacks Consensus Estimate for the third quarter 2012 remained static for the last 7 days, while it inched down by 3 cents to 1.09 cents over the last 30 days. For full year 2012, the Zacks Consensus Estimate did not witness any movement in the last 7 days but moved down by 4 cents in the last 30 days.

Surprise History

With respect to earnings surprises, Eaton has topped the Zacks Consensus Estimate in two of the last four quarters in the range of (2.70%) to 5.50%. The average surprise over the last four quarter remained at positive 0.80%. The earnings beat in June 2012 was the highest at 5.50%.

Our Recommendation

Eaton Corporation continues to reward its shareholders through payment of regular quarterly dividend. Moreover, it is busy with acquisitions. Recently, the company has completed the proposed acquisition of Santiago-based Rolec Comercial e Industrial S.A. This transaction involves acquisition of all the shares of the Chilean firm. Moreover, the company is progressing well with the acquisition procedure of Cooper Industries plc (CBE).  Yesterday, the company received approval from Russia's Federal Anti-Monopoly Service and the Competition Commission in South Africa.

It has already received approval from competition authorities in the United States, Brazil, Canada, Mexico, South Korea and Turkey, as well as all necessary approvals of the shareholders of Eaton and Cooper. However, the transaction remains subject to customary closing conditions, including certain additional regulatory clearances.

In view of Eaton's last few acquisitions, it is evident that the company intends to diversify its portfolio while expanding its line of businesses as well as its global footprint. However, we are skeptical about slow economic growth rate in the emerging countries and volatile currency market conditions, which might have a negative impact on Eaton's forthcoming performance.

The company presently retains a short-term Zacks #4 Rank (Sell). We have a long-term Neutral recommendation on the stock.

Cleveland, Ohio-based Eaton Corporation is a diversified power management company and a global technology leader in electrical components and systems for power quality, distribution and control; hydraulics components, systems and services for industrial and mobile equipment; aerospace fuel, hydraulics and pneumatic systems for commercial and military use; and truck and automotive drivetrain and powertrain systems for performance, fuel economy and safety.



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Tickers in this Article: ETN, CBE

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