Can Eaton Earnings Top Emerson Electric and ABB?

Eaton (NYSE: ETN  ) will release its quarterly report on Friday, and shareholders have to be pleased with the stock's recent all-time record highs. But even as the electrical components and equipment company continues to integrate its purchase of Cooper Industries last year, competition from ABB (NYSE: ABB  ) and Emerson Electric (NYSE: EMR  ) will continue to challenge Eaton earnings well into the future.

Eaton's $11.8 billion acquisition of Cooper transformed its overall business, leading the company toward a sharper focus on the power industry. But Eaton wasn't the only company making big M&A waves, as ABB bought Thomas & Betts earlier in 2012 to enter the potentially lucrative U.S. market. Meanwhile, with Emerson and General Electric (NYSE: GE  ) already well-ensconced in the industry, Eaton consistently has to fight to stay ahead of its rivals. Let's take an early look at what's been happening with Eaton over the past quarter and what we're likely to see in its report.

Stats on Eaton

Analyst EPS Estimate

$1.12

Change From Year-Ago EPS

4.7%

Revenue Estimate

$5.7 billion

Change From Year-Ago Revenue

44%

Earnings Beats in Past 4 Quarters

1

Source: Yahoo! Finance.

Can Eaton earnings finally produce the growth investors want?
Analysts haven't been too optimistic about Eaton earnings in recent months, cutting their third-quarter estimates by a dime per share and their full-year 2013 and 2014 projections by 3% to 4%. The stock, though, rose modestly, posting gains of 2% since late July.

Eaton came into the quarter on a somewhat disappointing note, with second-quarter earnings failing to meet investors' expectations. Sales and operating income rose to record levels because of the Cooper acquisition, but on a per-share basis, operating earnings fell 5%. CEO Alexander Cutler cited soft market conditions for the 2% decline in core organic sales net of acquisition-related gains, and Eaton cut its already modest full-year growth estimates to just 1%. That's consistent with what Emerson Electric and ABB have experienced, but it doesn't bode well for the more aggressive sales gains that investors had hoped to see.

But Eaton still has huge potential in the energy-infrastructure area, even as Emerson Electric, ABB, and General Electric have all made their own efforts to capture the growth potential of the industry. Businesses across the world are trying to improve the energy efficiency of their operations, and Eaton now has increased capacity to help them in achieving their energy goals. Given the magnitude of the challenges facing the aging power grid in the U.S., there's ample work for Eaton and all of its peers to do and spread success through the industry.

Eaton also has the ability to innovate in other areas. Its new self-cleaning filtration strainer promises to capture smaller particles than competing products in a cost-effective manner, making it extremely useful for applications that require contamination-free operating environments. Moreover, although the Cooper acquisition greatly boosted its core electrical segments, Eaton's hydraulics, aerospace, and vehicle segments all have their own opportunities to see better results in the future. They also give Eaton some exposure to business lines where ABB and Emerson Electric aren't as well-represented.

In the Eaton earnings report, watch to see how the large addition of debt on the company's balance sheet affects its results. Eaton was fortunate to make its move in a low-interest rate environment, but even so, going from less than $4 billion in long-term debt in 2011 to more than $9 billion as of June 30 will require some adjustments to ensure Eaton can support interest payments and still boost profits. Only if it can successfully adjust to those new conditions will Eaton top competitors ABB and Emerson Electric in the long run.

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