We’re upgrading Eaton as shares of the industrial AI winner fall on earnings
Electrical equipment supplier Eaton , whose products are essential to AI data centers, on Tuesday reported a solid second quarter and raised its full-year outlook. Nevertheless, the stock tumbled in response because the positive results fell short of the sky-high bar that Wall Street had set. Adjusted earnings per share for the second quarter ended in June rose 8% from the year-ago period to $2.95, beating the LSEG compiled analyst consensus estimate by three cents. Revenue rose 10% to $7.03 billion, beating the LSEG compiled analyst consensus estimate of $6.9 billion. Organic sales grew 8%, exceeding the Bloomberg estimate for a 7.5% increase. Shares of Club name fell more than 6% on Tuesday in reaction to the small beat and raise. With the stock’s excessive optimism finally washed out, we’re taking a more opportunistic stance on Eaton. Based on the updated spending plans of American tech giants and everything we heard from Eaton on Tuesday, it’s clear the AI buildout isn’t slowing down. ETN YTD mountain Eaton’s year-to-date stock performance. Bottom line Eaton entered earnings season with lofty expectations because beats and raises have become the norm for this power management company with heavy ties to attractive end markets like data centers, utilities and aerospace. The quarter was mostly clean, but the market took issue with two things looking ahead. First was the third-quarter outlook, which was not better than the consensus expectation. The second issue was its 2025 profit guidance. Even though Eaton raised the midpoint of its full-year adjusted earnings per share outlook, management shaved a little off the top end, citing “some lingering macro uncertainties and also tariff question marks.” Still, Eaton has a very bright future. If you dig deeper into its full-year guide, it implies a strong uplift in the fourth quarter. Sometimes it’s right for investors to question a pick up later in the year beyond normal seasonality, but Eaton is a special situation. By the fourth quarter, Eaton should see more benefits from previous capacity investments, which will allow it to ship more product. “We have around a dozen projects that are ongoing. Six of them, the construction is done,” CEO Paulo Ruiz explained on the earnings call, his first since taking over for Craig Arnold in June. Some of those capacity investments are for transformers, switchgear, and other data center-focused electrical equipment that are in short supply. Eaton Why we own it: Eaton has exposure to several important megatrends like electrification, energy transition, and infrastructure spending. It is also a player in generative AI, where data centers use its power management solutions and electrical equipment to keep up with the heightened demand for more computing power. We see a long runway for growth. Competitors : Parker-Hannifin , DuPont and Honeywell Most recent buy : April 3, 2025 Initiated : Nov. 15, 2023 We also found the conference call to be quite bullish, with management focusing on how it is playing offense through investing in growth. For example, the executive team outlined the strategic rationale behind its two recent acquisitions — a double-digit grower in aerospace and another that improves its power distribution services for data centers. Ruiz also talked up important partnerships with Club name Nvidia and Siemens Energy , which makes the supply-constrained gas turbines used to generate electricity. Given the strong growth that lies ahead coupled with a stock that has pulled back more than 7% from its record close on July 28 — we sold some shares stock into that strength — we want to get more constructive on Eaton at these levels. We are increasing our price target to $400 from $375 and upgrading our rating on the stock to a buy-equivalent 1. Quarterly Commentary Eaton’s Electrical Americas segment — covering electrical and industrial components, as well as various power products — delivered a “triple beat,” with better-than-expected revenue, profit, and segment margins. On a 12-month basis, orders increased 2% and accelerated from a 4% decline reported in the first quarter. One reason why orders were so robust was the strength in the data center end market, where orders increased about 55% year over year and grew sequentially by more than 20%. Eaton believes it is picking up share in this fast-growing area based on this strong performance. Management also noted particular strength from multi-tenant data center customers. Eaton increased its presence in this market through its recent $1.4 billion acquisition of Fibrebond. Electrical Americas’ backlog was also up 17% year over year to $11.4 billion, providing a solid visibility into future growth. Plus, there’s still plenty of momentum in mega project announcements, which management says gives them a “multi-year runway” of growth. Electrical Global also reported a triple beat across sales, segment profit, and segment margins, which were a record. Driving the unit’s 7% organic growth was strength in the data center and machine original equipment manufacturer (OEM) end markets. Orders fell 1% on a 12-month rolling basis, but the backlog increased 1% versus last year. Aerospace was only a double beat. Sales and segment profit were both better than expected. Margins, however, did not expand as much as anticipated. Still, it was a pretty good number all around with growth in every end market. Orders increased 10% on a rolling 12-month basis, and the backlog was up 16% year over year and 3% sequentially. Guidance Eaton raised its full-year outlook for organic growth and segment operating margins, as well as the midpoint of its adjusted EPS forecast. It now expects organic growth of 8.5% to 9.5%, reflecting an increase of one percentage point at the low end of the prior range. Margins are expected to be 24.1% to 24.5%, an increase from the prior view of 24% to 24.4%. Adjusted EPS is expected to be in the range of $11.97 to $12.17. This new midpoint of $12.07 is up from the prior midpoint of $12.00 and is slightly above the consensus of $12.03. However, the high end of the outlook was lowered in this revised guide. Despite the improved full-year view, the third quarter outlook was a little light. Organic growth is projected to be in the range of 8% to 9%, which is below the Bloomberg consensus estimate of 9.17%. Segment margins are expected to be 24.1% to 24.5%. Adjusted EPS is expected to be in the range of $3.01 to $3.07, which is a miss versus the $3.09 consensus estimate. Although the stock may be selling off due to the light third-quarter outlook and the lowered top end of the 2025 EPS guidance, analysts at Morgan Stanley wrote on Tuesday that it implies a stronger-than-expected fourth quarter. That might be the better number to focus on because Morgan Stanley says it’s a sign that the business has a positive trajectory into 2026. (Jim Cramer’s Charitable Trust is long ETN and NVDA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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