Tags: Cooper | Industries | Eaton | CBE

Cooper Industries Sees Growth Despite Creeping Inflation

By    |   Friday, 24 August 2012 10:58 AM

Cooper Industries (CBE), on the cusp of a merger that will join it with Eaton Corporation (ETN) in a new, renamed entity, sees growth well in hand. Nevertheless, management recently warned that inflation is creeping up, adding to costs.

Cooper Industries manufactures electrical distribution equipment, support systems, hazardous duty electrical equipment, lighting fixtures, emergency lighting and fuses.

Cooper operates in two business segments: energy and safety solutions and the electrical products group. With its two business segments, Cooper serves four major markets: industrial, commercial, utility and residential. Cooper also serves the electronics and telecommunications markets.

“We do expect continued strong execution reflecting our stated goal of 20 percent-plus leverage, at the same time, do remain concerned about material inflation, and we're certainly feeling pressure in certain areas like freight, steel and certain petroleum-based inputs,” said David A. Barta, Cooper’s chief financial officer, in a recent call with analysts.

“Additionally, we remain cautious regarding the competitive price dynamics for large projects.”

On May 21, 2012 Cooper entered into an agreement to merge with Eaton Corporation. As a result of the deal, both Eaton and Cooper will become wholly owned subsidiaries of New Eaton. The deal is expected to close in 2012.

Cooper Industries has a market cap of $11.83 billion in a sector, electrical equipment, where the average company size is $2.48 billion. Its trailing 12-month P/E ratio is 17.83 and its five-year projected price-to-earnings-growth (PEG) ratio is 1.46, compared to 0.65 for the sector.

Its projected earnings per share growth for the coming year is 10.45 percent, compared to a sector average of 15.18 percent.

Raised estimate

Analysts are positive on CBE, with buy or outperform calls Lehman Brothers and Oppenheimer & Company.

“We raise our '12 EPS estimate 6 cents to $4.45 and initiate '13's at $4.96. CBE posts Q2 EPS of $1.17, vs. 96 cents, a nickel above our forecast. Sales were in line, but operating margins, equity income from a joint venture, interest expense and taxes were all better than we expected,” Standard & Poor’s Equity Research analysts wrote on July 25, keeping Cooper as a hold.

“Despite a challenging Western European economy, CBE posted organic growth in the region. We expect total revenues for CBE to rise nearly 8 percent this year. We anticipate the sale of CBE to Eaton for a combination of cash and ETN stock to close during the second half of the year.”

Cooper Industries next reports on Oct. 18.

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