A month has gone by since the last earnings report for Eaton Corporation (NYSE:ETN) . Shares have added about 8.22% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is the stock due for a pullback? Before we dive into how investors and analysts have reacted of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Recent Earnings
Eaton's third-quarter 2016 operating earnings per share of $1.15 were a penny above the Zacks Consensus Estimate. Also, reported earnings were within management’s guidance range of $1.00 to $1.20 per share. Moreover, the bottom line surged 20% from the year-ago quarter figure.
Revenues
In the quarter under review, Eaton’s total revenue came in at $4.99 billion, lagging the Zacks Consensus Estimate of $5.05 billion by 1.2%.
On a year-over-year basis, revenues were down nearly 4% due to lower Aerospace (2.9%), Vehicle (12.4%), Electrical Systems and Services (3.4%), and Hydraulics (6.1%) sales.
Unfavorable currency translation and a decline in organic sales were the primary reasons for the revenue decline. Sales took a 1% hit from currency translation, while the drop in organic sales accounted for 3%.
Quarterly Highlights
Cost of products sold in the reported quarter was $3,371 million, down 6.3% from the prior-year period.
Selling and administrative expenses decreased 5.9% to $853 million from $907 million a year ago.
In the third quarter of 2016, the company’s research and development expenses were $146 million, down 6.4% from $156 million in the prior-year quarter.
Interest expenses of $59 million remained unchanged from the prior-year quarter figure.
Eaton is on track with its restructuring program, which is expected to deliver $200 million of incremental profit in 2016 over the 2015 levels.
Financial Update
Eaton’s cash and short-term investments were $494 million as of Sep 30, 2016, compared with $268 million as of Dec 31, 2015.
As of Sep 30, 2016, long-term debt was $7,881 million compared with $7,746 million as of Dec 31, 2015.
Eaton repurchased shares worth $243 million during the third quarter.
Guidance
Fourth-quarter 2016 earnings per share are expected between $1.05 and $1.15.
For 2016, Eaton still anticipates organic revenues to decline 4%, reflecting persistently sluggish markets around the world. Currency translation is projected to have a roughly $225 million impact during the year.
Eaton narrowed its 2016 operating earnings guidance to the range of $4.15 to $4.25 per share from its prior expectation of $4.20–$4.40.
The company anticipates fourth-quarter 2016 and 2017 bookings to continue being soft due to the company’s cost control initiatives for 2017, which now targets savings of $180 million, up from its prior expectation of $130 million.
How have estimates been moving since then?
Following the release and in the last one month, investors have witnessed a downward trend for fresh estimates. There have been 10 revisions lower for the current quarter. The consensus estimate has shifted by -5.98 % due to these changes.
VGM Scores
At this time, Eaton's stock has a nice Growth score of 'B', though it is lagging a lot on the momentum front with a 'D'. However, the stock was allocated a grade of 'B' on the value side, putting it in the top two quintiles for this investment strategy. Eaton has a good historical EPS growth level of about 14.29%. From a momentum outlook, it is worth noting that the stock has weak earnings estimate momentum which includes falling estimates.
Zacks' style scores indicate that the company's stock is suitable for value and growth investors.
Outlook
While estimates have been broadly trending downward for the stock, the magnitude of these revisions indicates a downward shift. It's no surprise that shares of Eaton have a Zacks Rank #4 (Sell) and we are expecting negative returns from ETN in the next few months.
We think the company is a sell right now. Eaton could be considered a decent choice for value investors, but the lack of growth on the earnings estimate expectation front is definitely concerning.
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EATON CORP PLC (ETN): Free Stock Analysis Report
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