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Eaton Earnings: Margin Progression Prompts Us to Increase Our Valuation

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Narrow-moat-rated Eaton ETN put forth a solid third-quarter effort. Revenue of $5.88 billion was right in line with our expectations, but segment operating margin of 23.6% materially exceeded what we penciled in. These results, coupled with the company’s higher guidance, prompted us to lift our midcycle operating margin estimate by 50 basis points. Eaton’s margin progression is so far ahead of its 2025 target that the goal now looks laughably low. We think high-single-digit long-term revenue growth driven by infrastructure-related spending and the aerospace recovery should translate to strong operating leverage. Even modest operating leverage means Eaton should hit close to a 23% operating margin by 2025. These changes caused us to raise our fair value estimate to $206 per share from $195.

Eaton’s electrical Americas segment once again soared higher. Organic sales grew 19% year on year and grew sequentially too. Operating margin in the segment expanded 430 basis points year on year and 130 basis points sequentially. In turn, incremental margin rose to a resounding 50%. These results validate that Eaton is in an electrical supercycle in a formerly GDP-growth industry. Data centers and utilities were strong sources of strength, meaning the company is benefiting from electrification trends and the need to harden the grid. Furthermore, Eaton’s electrical backlog continues to grow and is now at $9.4 billion. That means that both the data center and utility-related trends we’ve highlighted should continue until next year. Artificial intelligence data centers in particular require higher power and power density, meaning that Eaton should participate in demand for greater electrical content.

Eaton’s aerospace segment continued to perform well, growing 10% year on year organically, with double-digit order and backlog growth. Original equipment manufacturer markets are exhibiting strength, and book/bill is at 1.2, meaning that demand remains strong.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Joshua Aguilar

Director of Equity Research, Resources
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Joshua Aguilar is the director of resources equity research for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc.

Aguilar joined Morningstar in 2016 as an associate on the financials team, and he was promoted to analyst on the industrials team in 2018 and to senior analyst in 2022. He has served as associates coordinator since 2021 and led Morningstar's diversity efforts as DEI co-chair since 2020. Aguilar has been a mentor to several associates on their paths to becoming analysts. He also has hosted a Morningstar earnings town hall, participated in analyzing Morningstar stock, and been a strong contributor through both client interactions and his General Electric stock call. Aguilar co-authored an Outstanding Research Achievement-winning piece with colleague Kris Inton on CEO compensation in 2021. He also has taught Morningstar's model to new hires for many years as part of the valuation committee.

Before joining Morningstar, Aguilar was a practicing business transactional attorney in Florida. He graduated magna cum laude with a bachelor's degree in political science and criminology from the University of Florida. He also has a Master of Business Administration from Rollins College and a Juris Doctor from Wake Forest University.

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