Eaton Corp. plc Earnings: Margin Improvement Leads Bottom-Line Advance in Q4

By Markets Fool.com

Eaton Corp. plc posted fourth-quarter sales of roughly $5.565 billion, up about 1% year over year. Earnings, however, advanced over 20% to $1.23 per share. The big story was margin improvement.

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Behind here, ahead there ...
Eaton's top line of $5.565 billion in the quarter fell slightly short of analyst expectations of roughly $5.59 billion. That's not surprising, given the company's yearlong comments about the global growth slowdown in its core markets. On the bottom line, however, Wall Street had been expecting earnings of $1.20 a share, but Eaton beat that figure with its $1.23 tally. Excluding one-time items, the quarter's earnings would have been $1.27 a share.

For the full year, Eaton's sales were up a touch over 2%, going from $22.05 billion to $22.55 billion. That figure, however, fell slightly short of the average analyst expectation of $22.57 billion. Earnings, meanwhile, were down year over year largely because of costs associated with legal settlements reached in the second quarter. In 2014, Eaton earned $3.76 a share on a GAAP basis, versus $3.90 a share last year. But taking out one-time costs and adjusting for divestitures, Eaton reports that it earned $4.67 a share, beating analyst expectations of $4.61.

At the margins
The best news for the company was its margins. Year over year in the fourth quarter, margins improved 1.3 percentage points. The strongest results came from the Vehicle segment, where margins advanced 3.2 percentage points. Aerospace saw a 2.2-percentage-point improvement, with Electrical Products and Electrical Systems both showing a 1.1-percentage-point margin increase, year over year. The company's Hydraulics division was the lone laggard, with margins falling 0.7 percentage points.

Division

Year-Over-Year
Margin Change, Q4

Electrical Products +110 Basis Points
Electrical Systems +110 Basis Points
Hydraulics - 70 Basis Points
Aerospace +220 Basis Points
Vehicle +320 Basis Points

Operating profits in the Vehicle and Aerospace segments were up 28% and 19%, respectively, with both electrical segments showing operating profit increases of 8%. These solid results were offset by an 11% decline in Hydraulics, although Hydraulics accounts for only 11% or so of the company's total operating profits, so its impact was relatively small compared with the strong performance throughout the rest of the company.

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Looking to the future
Although the market reacted favorably to Eaton's earnings, the real reason behind the share-price advance is probably the company's positive outlook for 2015. It expects organic revenues to grow between 3% and 4%, according to CEO Alexander Cutler. Further, "For the full year 2015, we estimate that operating earnings per share, which exclude an estimated $45 million of charges to integrate our recent acquisitions, will be between $4.75 and $5.05 per share."

Division 2014 Margin Projected 2015 Margin Range
Electrical Products 17.2% 17.7%-18.3%
Electrical Systems 13.8% 14.5%-15.1%
Hydraulics 12.7% 12.1%-12.7%
Aerospace 14.7% 15.1%-15.7%
Vehicle 16.1% 17%-17.6%

That translates to an advance of roughly 3% at the low end of Eaton's guidance, to a far more impressive 9.5% at the high end. A big part of this performance is dependent on continued margin improvement. The company is looking for its margin to increase from 15.3% in 2014 across the company to between 15.9% and 16.5%.

This will be an increasingly important area for investors to monitor as the year progresses. If any segment falls materially short of expectations here, Eaton could see results fall at the low end of its earnings guidance range. That would probably lead Wall Street to take an unfavorable view of the company's results.

Still, for one day at least, Eaton investors can take heart that management is still managing to wring costs out of the system despite the sluggish growth environment. And that means the integration of the company's massive $13 billion purchase of Cooper Industries in 2012, the largest deal in company history, is still on track and, more importantly, continuing to aid results. If Eaton's estimates are on target, that trend will continue through this year, too.

The article Eaton Corp. plc Earnings: Margin Improvement Leads Bottom-Line Advance in Q4 originally appeared on Fool.com.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.