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Profits Are Skyrocketing for This New Electric Vehicle Business

By Reuben Gregg Brewer – Updated Nov 1, 2018 at 8:51AM

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This industrial giant is expanding a new electric vehicle segment, which is a huge, long-term growth opportunity

At first glance there's nothing particularly exciting about industrial conglomerate Eaton Corporation PLC (ETN 0.71%). But if you start to dig into the details of its business a little bit, you'll find that this industry giant has just started a new division that has huge growth potential. And it's in a very sexy industry niche, electric vehicles. Here's what Eaton is doing with electric vehicles and just how big a deal it really is for the company.

A focus on power management

Eaton breaks its business down into a number of different segments, including electric products (around 33% of second-quarter sales), electrical systems and services (28%), vehicle (16%), hydraulics (13%), and aerospace (8%). All of these businesses help customers make efficient use of power, which is the company's overall focus.   

Electric vehicle charging station handset glowing blue

Image source: Getty Images

However, in the first quarter of 2018 the company added a sixth division, eMobility. The new business is targeting the hot electric vehicle market. Eaton isn't looking to be a car company, but to supply power electronics, conversion, distribution, and circuit protection products to electric vehicle makers. All of which fits nicely with what the company already does, so it isn't trying to learn new tricks, just apply existing tricks to new markets. In fact, Eaton didn't need to rush out and buy a company to create this new operation, it just took relevant parts from its vehicle division and electronics divisions to build it with in-house businesses.   

This is important because it means Eaton already has expertise in the businesses it has brought together. And, perhaps more notably, it already has important industry connections. Original equipment manufacturers want to be certain of the quality of the parts they will get as well as the reliability of the provider before they include parts in their vehicles. That way, they can avoid having to change their manufacturing process in order to replace a supplier. And once a supplier is in the mix, it usually means years of consistent sales. The products Eaton offers, meanwhile, can be put into everything from passenger cars to heavy-duty off-road vehicles.   

How big a deal is this?

As you might expect, this division is pretty tiny right now, making up less than 2% of second-quarter sales. However, Eaton is already hard at work inking deals with vehicle makers. In fact, between the first and second quarters alone eMobility increased segment profits by a massive 27%. To be fair, that's from a small base, since the division is brand new. But it's an exciting number when you look at the long-term opportunity here.   

Eaton estimates that the electric vehicle segments it serves will be a $33 billion market in a little over a decade. It is projecting that sales for its eMobility business could be as high as $4 billion by 2030. Size-wise, that would put this division on par with its hydraulic, aerospace, and vehicle divisions today. 

Getting to that level, meanwhile, would result in pretty substantial growth. Using second-quarter sales to create an annual run rate, eMobility only generates around $350 million in revenue today. So Eaton thinks this division could be roughly 10 times larger in about a decade. If segment operating profit margins remain in the midteens, which is where they are today, that would translate into a business generating segment operating profits of around $640 million annually. And all of that from a business started in-house.   

A big opportunity

Clearly, eMobility is just one part of a much larger company. However, it adds an important new growth engine to Eaton's diversified business. If you are looking at the electric vehicle market and afraid to pick a vehicle maker, then consider adding this parts supplier and benefiting along with the company as it expands in a new niche. Even better, the stock appears reasonably priced today and offers a generous 3.4% yield -- so you get paid well to wait and watch as eMobility grows.

Reuben Gregg Brewer owns shares of Eaton. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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