Foolish Forecast: Breakfast at Eaton

Mmm. What's that that smells so good? Why, I do declare it's diversified industrial manufacturer Eaton (NYSE: ETN  ) , cooking up a fresh batch of fiscal first-quarter 2007 earnings news. Breakfast will be served before market open on Monday.

What analysts say:

• Buy, sell, or waffle? Seventeen analysts still follow Eaton, down one from this time last year. Lucky number seven of them rate Eaton a buy; nine others say hold; and the last counsels selling the stock.
• Revenues. On average, analysts expect a 1% rise in sales year over year, to $3.04 billion.
• Earnings. Profits are predicted to grow by a penny to $1.41 per share.

What management says:
CEO Alexander Cutler characterized last quarter's results as "strong," marking the "nineteenth quarter in a row with year-over-year operating earnings per share growth of more than 10 percent." Looking forward, he predicted that Eaton's "markets" will decline roughly 3.5% this year, which would be 1.5% worse than previously anticipated. Cutler attributed the expected decline "primarily ... [to] the expected dramatic decrease in the NAFTA heavy-duty truck market." Coupled with Cutler's observation that the "overall manufacturing sector experienced [a slowdown] in the second half of 2006 extending into the early portion of 2007," this doesn't bode well. But not to worry. Thanks to the six acquisitions Eaton made last year, the firm's "organic" decline in sales will be offset by new revenue streams, and Eaton expects its revenues for the year to be basically flat against 2006. 

What management does:
What's that I said? Flat is good? Well yes, in this case, it is. If the rest of the economy is on the decline, but Eaton can smoothly integrate its latest acquisitions, keep its sales up, and continue building on the trend of rising net margins (and more or less stable gross and operating margins) reflected below, we might well see Eaton's profits rise this year, regardless of the economy's slowdown.

Margins	9/05	12/05	3/06	6/06	9/06	12/06
Gross	28.5%	28.3%	28.3%	28.2%	27.5%	28.1%
Operating	9.9%	9.8%	9.8%	9.7%	9.2%	9.8%
Net	7.2%	7.3%	7.2%	7.4%	7.5%	7.7%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
In last quarter's earnings release, Cutler specifically drew investors' attention to the fact that Eaton's "Electrical and Fluid Power businesses [contributed] 70 percent of our overall segment operating earnings." At first glance, I admit I was wondering why that was significant -- I mean, sure, 70% is more than the 66% of Eaton's revenues that these two business contribute. Further examination of the company's history revealed the reason: In both 2004 and 2005, these two businesses had contributed a smaller proportion of profits than they had of revenues to Eaton's bottom line. What Cutler was saying, therefore, is that he's effected a turnaround in these businesses.

If you combine the expanding margins in the company's largest segment with the factors we discussed in the Feb. 26 edition of "This Just In," and Cutler's assessment that sales should remain stable this year, then Eaton's looking pretty good.

Did you miss the "This Just In" column on Eaton's twin upgrades? Read it now.

Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.