Stock Analysis

Eaton's (NYSE:ETN) Recent Business Rotation and Increased Debt May be Weakening Fundamentals

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Eaton Corporation plc's (NYSE:ETN) share price has soared 144% in the last half decade. Most would be very happy with that. In the last week, shares have slid back 1.1%, which seems to be part of a recent reversal of a very long-lasting bull run. In this analysis, we will take a look at the fundamental performance and evaluate if Eaton's bull run is at an end.

So let's investigate and see if the longer term performance of the company has been in-line with the underlying business' progress.

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Eaton is involved with a number of acquisitions and sale of divisions. It seems that, the broad picture shows Eaton consolidating operations towards their strongest segments now classified as Electrical Americas and Electrical Global.

The segment's revenue distribution for Eaton gives investors better clarity as to the business direction. Here are the numbers by segment for the six months ending on June the 30th:

  • Electrical Americas - US$3.47b
  • Electrical Global - US$2.67b
  • Hydraulics - US$1.12b (keep in mind that this segment has been sold off to Danfoss, and is pending finalization)
  • Aerospace - US$1.14b
  • Vehicle - US$1.33b
  • eMobility - US$171m
  • Total - US$9.9b, up from US$8.65 in the same period in 2020

We can see that the company is involved in multiple segments, some, like the electrical business is a legacy branch and the stable source of income, while aerospace and the vehicle segment represent the growth and innovation potential for investors. As we will see below, Eaton will cut the Hydraulics segment.

As it is significant to the future of the business, we will briefly list the acquisitions in which Eaton is involved in, as well as in which segment they pertain to:

  • In 2020 Eaton acquired Power Distribution Inc. - Electrical Americas. The business had annual sales of US$125m
  • In 2020 Eaton sold its Lighting business to Signify N.V. for US$1.4b cash - Electrical Americas. The business was generating annual sales of US$1.6b
  • In 2021 Eaton acquired Tripp Lite for US$1.65b - Electrical Americas. The business had annual sales of $400m
  • In 2021 Eaton acquired Green Motion SA for US$105m - Electrical Global segment
  • In 2021 Eaton acquired a 50% stake in HuanYu High Tech - Electrical Global segment. The business had annual sales of US$106m
  • In 2021 Eaton acquired Cobham Mission Systems (CMS) for US$2.8b - Aerospace segment. The business had annual sales of US$700m
  • In 2021 Eaton acquired a 50% stake in Jiangsu YiNeng Electric's busway business - Electrical Global segment. The business had annual sales of US$60m
  • In 2021 Eaton sold its Hydraulics business to Danfoss A/S for US$3.3b. Hydraulics segment. The business had annual sales of US$1.8b

From the summary above, we can see that Eaton Hydraulics is consolidating their electrical business both globally and in the Americas. If done right, these acquisitions may put the business in a solidified leadership position in the coming years. It seems that these acquisitions are part growth and part innovation driven.

The last item is the selling of the Hydraulics segment, which essentially means that Eaton will adopt a narrower portfolio, mostly focusing on electricity. The hydraulics segment was generating substantial revenues for Eaton, however it experienced a multi-year decline, with revenues at: US$1.8b in 2020, US$2.2b in 2019, US$2.4b in 2018. It seems that this is a troubled segment for Eaton - performance wise, and one can't help but wonder if the difficulties stemmed from macro factors, competition or (mis)management.

It seems that Eaton sold 2 businesses with a combined revenue income of US$3.4b. This represents a significant rotation in the business model and may have a short term impact on the top line, before Eaton is able to offset the losses with additional growth.

View our latest analysis for Eaton

Fundamental Performance

In order to put the above information into perspective, we turn to the fundamental performance of the business and evaluate what growth is expected and where it will come from.

It seems that the pandemic had a material impact on revenues, and analysts estimate a slow recovery for the company.

NYSE:ETN Fundamental History and Estimates September 22nd 2021

The US$19b in revenue are targeted to grow and become US$21.6b by the end of 2024. 

While Eaton's sales declined in 2020 it seems that the global region declined less (-9%), than the Americas (-18.3%). This indicates that emerging markets have more growth potential than western markets, and Eaton may be working in shareholder interest in focusing on emerging market acquisitions and innovative solutions.

Another important aspect of the company is their leverage, and we will analyze their balance sheet in order to get a sense of the risk that investors buy into from Eton's debt.

What Is Eaton's Debt?

As you can see below, at the end of June 2021, Eaton had US$12.2b of debt, up from US$8.45b a year ago. However, it also had US$540.0m in cash, and so its net debt is US$11.6b.

NYSE:ETN Debt to Equity History September 22nd 2021

Unfortunately, it seems that Eaton's debt did increase in 2021, and this will represent additional pressure in the short term with the anticipated decline of because of the above-mentioned divestitures.

How Healthy Is Eaton's Balance Sheet?

According to the last reported balance sheet, Eaton had liabilities of US$8.91b due within 12 months, and liabilities of US$12.4b due beyond 12 months. Offsetting this, it had US$540.0m in cash and US$3.50b in receivables that were due within 12 months. So, its liabilities total US$17.3b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Eaton is worth a massive US$61.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. Apparently, the company did need additional cash, and had US$2.2b in cash inflows from financing in the last 12 months.

However, it is still worthwhile taking a close look at its ability to pay off debt.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Eaton has a debt to EBITDA ratio of 3.6 and its EBIT covered its interest expense 6.9 times.

This suggests that while the debt levels are significant, we'd stop short of calling them problematic. Also, relevant is that Eaton has grown its EBIT by a very respectable 21% in the last year, thus enhancing its ability to pay down debt.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Eaton actually produced more free cash flow than EBIT.

Key Takeaways

Eaton seems to be involved with an aggressive rotation of their business model and shaved off US$3.4b of revenue generating business by way of divestitures. The company seems to be consolidating at the place where they are most effective - which is their electrical business both in the Americas and Globally. The Global segment declined less in 2020, which indicates that there lies the most potential where future growth can be found.

We are a little concerned by its net debt to EBITDA, not by the carrying capacity of today's revenues, but the short term top-line may take a hit based on recent acquisitions and that is not yet accounted for. On a positive note, the company does successfully manage to convert EBIT into Free Cash Flows, which leaves breathing room for paying off debt.

It seems that the market valuation has gone beyond the intrinsic value of Eaton, and the fundamentals now encompass reduced revenue generation and higher risk because of leverage and Marco trends.

Be aware that Eaton is showing 2 warning signs in our investment analysis, you should know about.

If, after all that, you're more interested in a fast-growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Valuation is complex, but we're helping make it simple.

Find out whether Eaton is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Goran Damchevski

Goran Damchevski

Goran is an Equity Analyst and Writer at Simply Wall St over 4 years of experience in financial analysis and company research. Personally, Goran has over 4 years of experience in financial analysis and company research, where he previously worked in a seed-stage startup as a capital markets research analyst and product lead and developed a financial data platform for equity investors. 



Eaton Corporation plc operates as a power management company worldwide.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Future Growth1
Past Performance3
Financial Health3

Read more about these checks in the individual report sections or in our analysis model.

Established dividend payer with mediocre balance sheet.