Doing Things Right at Eaton

Renia is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

No, there’s no cause for alarm even as Eaton Corporation (NYSE: ETN), the Cleveland-based manufacturer of industrial products, reported an earnings decline in the 2012 fourth quarter to $179 million, or 46 cents per share, from the year-ago earnings of $362 million, or $1.07 per share. What weighed down Eaton in the October–December 2012 period is actually what will help keep it buoyant and rising into the future: its estimated $13 billion acquisition of electrical equipment supplier Cooper Industries (NYSE: CBE) late last year.

Factoring in the costs related to the Cooper acquisition, EPS for 2012 resulted in an adjusted $0.82, significantly lower that the 2011 level and well short of the $0.93 Wall Street watchers had expected. But still, Eaton's shares rose 4.9% following its fourth quarter results’ announcement. Much of this favorable market reaction can be attributed to what the acquisition of Cooper will eventually bring in to Eaton’s bottom line.

Milestone Transformation Achieved

Eaton dubbed its takeover of Cooper not only as the largest in its 101-year history but also a transformational milestone. With this acquisition, the company expanded its global market reach to more than 150 countries, and broadened its portfolio of products, services, and solutions. Added to Eaton’s strengths in power distribution, power quality, and energy services were Cooper’s tested capabilities in utility power distribution, lighting, lighting controls, safety solutions, smart grid, and wiring devices.

Moving forward, Cooper’s contribution to Eaton in the future can already be gleaned in the latter’s 2012 fourth quarter results. Acquisitions, all told, contributed 14% in Eaton’s revenues during the three-month period, with Cooper accounting for a 12% slice. Further growth of this share can be expected as the integration of operations is set firmly in place, a process that Eaton management expects to achieve in 24 to 36 months.

To Eaton’s credit, the company was likewise able to secure very attractive financing for its Cooper acquisition, thereby manifesting the rosy financial health of the company. To acquire Cooper, Eaton bagged term loans of $4.9 billion at manageable maturities of 3 to 30 years with a 2.74% average rate. As a further manifestation of its robust balance sheet, the company has already repaid bridge financing for the acquisition using its $1.67 billion bridge facility to close the Cooper deal.

Eyes Firm on Emerging Technologies

By successfully incorporating Cooper’s technologies with its own, Eaton expects to further accelerate its growth as a global integrated power management firm. This integration, Eaton said, will be focused on addressing the rising costs and increasing environmental impact of the world’s growing energy use, considered to be one of the most challenging megatrends at present.

Linkage with Ford’s MyEnergi Lifestyle

Toward this objective, this January Eaton joined Ford (NYSE: F), SunPower Corporation, and Whirlpool Corporation in a collaborative program to develop technologies for smart home energy use. Essentially, these technologies will explore energy-source possibilities from the lineup of electric and electric hybrid vehicles that Ford is set to launch this year.

The Ford project, dubbed as MyEnergi Lifestyle, will attempt to bring renewable energy generation into American homes. It aims to optimize household energy use through “time-flexible” loads across a Ford plug-in vehicle and home appliances. The collaboration hopes to showcase how an average American home can substantially reduce not only electricity consumption and power costs, but also its carbon footprint.  

Eaton at the End of the Day

The Cooper deal and the other acquisitions that Eaton completed in 2012 are bull factors for the company this year. Eaton expects these acquisitions to contribute $6 billion in revenues for 2013. The company estimates that its first quarter operating earnings this year will hover between $0.70 and $0.80 per share, and this forecast already includes the $0.06 charge to complete the inventory purchase price adjustment following the Cooper deal. Full year 2013 operating earnings per share, excluding an estimated $145 million cost of integrating the acquisitions, is forecast at between $4.05 and $4.45 per share. Overall, Eaton predicts that 2013 will be a banner year in terms of operating earnings per share, an expectation that certainly merits taking a position in this company. 


ReniaBula has no position in any stocks mentioned. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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