Eaton (ETN) is a solid industrial company. Its specialty is power management. Eaton makes electrical components and systems, hydraulics components and systems, and pneumatic systems with a variety of applications.
It has racked up solid earnings recently. But Eaton is a cyclical company, meaning it does best when the economy is strong. With much of the global economy turning stagnant, it might be a good idea to wait on purchasing Eaton stock, picking it up on as a value play if its share price slips lower.
As for earnings, Eaton’s profit soared 49 percent in the second quarter to $336 million from a year earlier. Sales jumped 21 percent to $4.09 billion. Operating margins in the company’s segments hit a record 13.9 percent, and management raised its full-year 2011 target to 14.5 percent.
Many analysts are bullish on Eaton, including Mathew Christy of Standard & Poor’s, who has a four-star buy rating on the stock (out of a possible five). “We think ETN will experience significantly improved results as the company benefits from an expected recovery in the global economy,” he wrote in early August.
“In addition, we see higher sales in businesses that can be characterized as mid-cycle, which comprise about a third of total revenue, along with greater end-market demand.”
Christy forecast a revenue increase of 19 percent for 2011 as a whole, again based on belief in a continuing global economic recovery.
But the economic outlook for the United States and Europe has worsened sharply in the past few weeks. Annualized U.S. growth has been revised down to 1 percent for the second quarter and 0.4 percent for the first quarter.
Most economists expect little pick-up in the second half of the year and some fear a double-dip recession. The picture isn’t any better in most of Europe, where even France and Germany are at risk of falling into another downturn.
Eaton generates 26 percent of its sales in emerging markets, but those economies are starting to slow too. The company next reports around Oct. 20.
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