Eaton Corp. (ETN), a diversified industrial manufacturer, reported excellent second-quarter results Monday that showed strong revenue growth and solid earnings expansion. The firm’s top line expanded 21% during the period (14% core), while the company’s segment margins at the operating level reached all-time highs of 13.9%. This led to net income expansion of almost 50% from last year’s quarter, a fantastic showing. Eaten also bumped up its end-market growth expectations for 2011 by a percentage point to 11%, while it raised the midpoint of its full-year earnings per share guidance by $0.15 to $4.06 per share at the high end. Eaton’s results are consistent with the strength we’ve seen at other industrial companies, including United Technologies (UTX), Honeywell (HON), and General Electric (GE).
We were particularly encouraged by bookings growth in Eaton’s electrical segment (Americas), which increased 9% in the quarter, suggesting that operating strength will continue through at least the end of this year. The firm’s hydraulics segment performed even stronger, with bookings jumping 20% in the quarter. Importantly, profitability in this segment reached all-time highs on record margins, and we think there is further room to leverage future sales expansion in this segment into even stronger margins. The firm’s bookings in aerospace fell 1% in the quarter, as a result of weakness in military orders. However, we think this weakness is temporary and strength in commercial aerospace in coming years will more than contribute to nice growth in this segment. However, such comments from the firm do reflect negatively on the outlook for defense spending and defense contractors in general. Revenue in Eaton’s truck segment jumped nearly 40%, with truck production up 27% in the period. The company’s automotive segment rounded out its strong performance in the quarter, with an 18% jump in sales and expectations for further margin expansion relative to previous expectations.
Overall, Eaton posted solid second-quarter results that reinforce our view that industrial earnings will continue to be strong at least through the end of 2011, particularly on the firm’s order and margin outlook. We think Eaton looks attractive under $40 per share, which factors in an appropriate margin of safety given risks inherent to its business.