5 Things Eaton Corp. plcs Management Wants You to Know

By Markets Fool.com

Eaton CEO Sandy Cutler was pretty pleased with 2014's results. He happily explained why, noting that the diversified industrial products company is achieving success where it says it will. He was also quick to point out some headwinds for 2015. All in, however, Cutler thinks this year will be another good one.

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A "delightful" year
Summing up the fourth quarter, Cutler noted, "[W]e finished the year with a strong quarter of performance. We are really delighted that our operating earnings came in at $1.27, up [a] full 18% over year ago and that was versus our guidance as you recall of a $1.20 for the fourth quarter." In other words, the company not only lived up to its guidance, it beat it. One of the big reasons for that was "organic revenue growth of 5%, the highest since the fourth quarter of 2011," Cutler said. A strengthening U.S. market, a region that accounts for roughly half of the company's business, was the main support here. That said, new products like LED lighting are also doing well.

Margins
Clearly, Eaton is doing something right when it comes to running its core businesses and Cutler has a right to be delighted. But the really big deal for the company was margins. "We had record fourth quarter segment margins at 15.9%." The company's third-quarter margin was 16%, and it had been predicting a normal seasonal decline of around 0.5 percentage points. But it did substantially better than that, supporting the guidance beat and year-over-year operating earnings advance.

The benefits of cost containment efforts and synergies from the continued integration of the late 2012 addition of Cooper Industries were main drivers on the margin side. It's worth noting that at $13 billion, Cooper was the largest acquisition ever undertaken by Eaton. Management expects more cost savings to come.

A pair of trouble spots
The company saw notable strength in its electric products (around 33% of the business), aerospace (about 10%), and auto segments (17%). The electrical systems and services (29%) and hydraulic (13%) segments, however, didn't do as well. That said, electrical systems' flat showing with improving margins wasn't nearly as bad as the hydraulic segment, where volume declined 6% and margins shrank year over year in the quarter. The problem, however, is that these two segments are likely to remain sore spots because of the trends taking shape within each area.

For example, Cutler noted that, within the electrical systems group, "Many of you, I am sure are looking at the bookings progression here, 3% in the third quarter, zero percent in the fourth quarter." That trend means "that we would expect to start in this segment a little slower in the first half." So watch for progress here, with management calling for a stronger second half of the year when it believes demand from larger industrial projects, which have fallen off of late, will start to pick up again.

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On the hydraulic side of the business, Cutler said, "It was the OEM side of this business that was down again double-digit, down 22% and the story within that OEM weakness is exactly the same as [it] was in the third quarter." Essentially, the agriculture business is really weak. Eaton plans to restructure this business to better work through this difficult period, but is still expecting 2015 to be flat to down for both organic sales and margins. Essentially, Cutler sees the "retrenchment" in the agricultural sector continuing and believes that Eaton has to adjust to a new reality.

Source: ProjectManhattan, via Wikimedia Commons

Currency will be drag
Another notable issue for Cutler was currency volatility. For 2015, the CEO said, "[W]e are expecting ForEx is about a negative $0.20 this year." While explaining that the United States remains a strong point and the rest of the world seems to be weaker, he made a point of highlighting that "the newest factor that was introduced in the second half of 2014 is the extreme currency volatility that we've all seen and that's done nothing but accelerate into the New Year here." So with half of the company's business conducted in foreign markets, this is another issue to monitor. That said, the company has included the $0.20 a share headwind in its full-year guidance of $4.75 to $5.05 a share.

Another record year
With those negatives duly noted, Cutler is looking for "another record year in 2015." It won't be a knock the leather off the ball home run year, but if Eaton keeps living up to its self imposed goals, look for organic revenue growth of around 3% to 4% and operating earnings growth of around 5%, with continued margin improvement playing a lead role.

The article 5 Things Eaton Corp. plcs Management Wants You to Know 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.