We're upgrading Eaton as shares of the industrial AI winner fall on earnings
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Electrical equipment supplier Eaton , whose ducts are essential to AI data centers, on Tuesday reported a solid second quarter and raised its full-year outlook. Nevertheless, the stock tumbled in...
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August 5, 2025
07:20 PM
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Electrical equipment supplier Eaton , whose ducts are essential to AI data centers, on Tuesday reported a solid second quarter and raised its full-year outlook
Nevertheless, the stock tumbled in response because the positive results fell short of the sky-high bar that Wall Street had set
Adjusted earnings per for the second quarter in June rose 8% from the year-ago period to $2.95, beating the LSEG compiled analyst consensus estimate by three cents
Revenue rose 10% to $7.03 billion, beating the LSEG compiled analyst consensus estimate of $6.9 billion
Organic sales grew 8%, exceeding the Bloomberg estimate for a 7.5% increase. s of name fell more than 6% on Tuesday in reaction to the small beat and raise
With the stock's excessive optimism finally washed out, we're taking a more opportunistic stance on Eaton
Based on the d spending plans of American giants and everything we heard from Eaton on Tuesday, it's the AI buildout isn't slowing down
ETN YTD mountain Eaton's year-to-date stock performance
Bottom line Eaton entered earnings season with lofty expectations because beats and raises have become the norm for this power management company with heavy ties to attractive end data centers, utilities and aerospace
The quarter was mostly clean, but the market took issue with two things looking ahead
First was the third-quarter outlook, which was not better than the consensus expectation
The second issue was its 2025 fit guidance
Even though Eaton raised the midpoint of its full-year adjusted earnings per outlook, management shaved a little off the top end, citing "some lingering macro uncertainties and also tariff question marks." Still, Eaton has a very bright future
If you dig deeper into its full-year guide, it implies a strong uplift in the fourth quarter
Sometimes it's right for investors to question a pick up later in the year beyond normal seasonality, but Eaton is a special situation
By the fourth quarter, Eaton should see more benefits from previous capacity investments, which will allow it to ship more duct. "We have around a dozen jects that are
Six of them, the construction is done," CEO Paulo Ruiz explained on the earnings call, his first since taking over for Craig Arnold in June
Some of those capacity investments are for transformers, switchgear, and other data center-focused electrical equipment that are in short supply
Eaton Why we own it: Eaton has exposure to several important megatrends electrification, energy transition, and infrastructure spending
It is also a player in generative AI, where data centers use its power management solutions and electrical equipment to keep up with the heightened demand for more computing power
We see a long runway for growth
Competitors : Parker-Hannifin , DuPont and Honeywell Most recent buy : April 3, 2025 Initiated : Nov. 15, 2023 We also found the conference call to be quite bullish, with management focusing on how it is playing offense through in growth
For example, the executive team outlined the strategic rationale behind its two recent acquisitions — a double-digit grower in aerospace and another that imves its power distribution services for data centers
Ruiz also talked up important partnerships with name Nvidia and Siemens Energy , which makes the supply-constrained gas turbines used to generate electricity
Given the strong growth that lies ahead coupled with a stock that has pulled back more than 7% from its record close on July 28 — we sold some s stock into that strength — we want to get more constructive on Eaton at these levels
We are increasing our price target to $400 from $375 and upgrading our rating on the stock to a buy-equivalent 1
Quarterly ary Eaton's Electrical Americas segment — covering electrical and industrial components, as well as various power ducts — dered a "triple beat," with better-than-expected revenue, fit, and segment margins
On a 12-month basis, orders increased 2% and accelerated from a 4% decline reported in the first quarter
One reason why orders were so robust was the strength in the data center end market, where orders increased 55% year over year and grew sequentially by more than 20%
Eaton believes it is picking up in this fast-growing area based on this strong performance
Management also noted particular strength from multi-tenant data center customers
Eaton increased its presence in this market through its recent $1.4 billion acquisition of Fibrebond
Electrical Americas' backlog was also up 17% year over year to $11.4 billion, viding a solid visibility into future growth
Plus, there's still plenty of momentum in mega ject announcements, which management says gives them a "multi-year runway" of growth
Electrical Global also reported a triple beat across sales, segment fit, and segment margins, which were a record
Driving the unit's 7% organic growth was strength in the data center and machine original equipment manufacturer (OEM) end
Orders fell 1% on a 12-month rolling basis, but the backlog increased 1% versus last year
Aerospace was only a double beat
Sales and segment fit were both better than expected
Margins, however, did not expand as much as anticipated
Still, it was a pretty good number all around with growth in every end market
Orders increased 10% on a rolling 12-month basis, and the backlog was up 16% year over year and 3% sequentially
Guidance Eaton raised its full-year outlook for organic growth and segment operating margins, as well as the midpoint of its adjusted EPS forecast
It now expects organic growth of 8.5% to 9.5%, reflecting an increase of one percentage point at the low end of the prior range
Margins are expected to be 24.1% to 24.5%, an increase from the prior view of 24% to 24.4%
Adjusted EPS is expected to be in the range of $11.97 to $12.17
This new midpoint of $12.07 is up from the prior midpoint of $12.00 and is slightly above the consensus of $12.03
However, the high end of the outlook was lowered in this revised guide
Despite the imved full-year view, the third quarter outlook was a little light
Organic growth is jected to be in the range of 8% to 9%, which is below the Bloomberg consensus estimate of 9.17%
Segment margins are expected to be 24.1% to 24.5%
Adjusted EPS is expected to be in the range of $3.01 to $3.07, which is a miss versus the $3.09 consensus estimate
Although the stock may be selling off due to the light third-quarter outlook and the lowered top end of the 2025 EPS guidance, analysts at Morgan Stanley wrote on Tuesday that it implies a stronger-than-expected fourth quarter
That might be the better number to focus on because Morgan Stanley says it's a sign that the has a positive trajectory into 2026. (Jim Cramer's Charitable Trust is long ETN and NVDA
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