Eaton Corp. (ETN +2.04%) had a great year in 2022, with record adjusted earnings of $7.57 per share, up 14% year over year. The company's move a few years ago to increase its focus on industrial electrical products was a key driver of this performance. Following the trends, the company created a division focused on the electric vehicle market. This division had an OK year in 2022, but it will really start to shine in 2023.
Over 100 years ago
Eaton traces its history back to 1911 to make gear-driven truck axles. It has changed greatly over the years, adding and subtracting businesses. For the last decade or so, it has focused on controlling power in various forms, including in the vehicle, aviation, and electric spaces. However, the really big move was the 2012 purchase of Cooper Industries, a transformational acquisition that cost $13 billion.
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Today, after exiting some less desirable businesses, Eaton has five divisions: electrical Americas, electrical global, aviation, vehicle, and eMobility. The two electrical divisions accounted for nearly 70% of sales in the fourth quarter of 2022. Aviation was around 15% of sales, and vehicle was 13%. That leaves eMobility the rest, or less than 3% of sales.
Clearly, the company's two electrical divisions are the driving force behind the business. And aviation is a nice business that is expected to see solid long-term growth. Aviation achieved an all-time record for sales and operating profit in the fourth quarter, and the backlog grew 21%, suggesting that strong results will continue.
The vehicle division, meanwhile, tends to be highly cyclical. And it is facing a material long-term headwind as the world shifts more and more toward electric vehicles, which is exactly why Eaton created its eMobility division a few years ago. The hope is that this new division will grow even as the older vehicle business starts to shrink.
From the ground up
With a strong position in the vehicle industry and a strong position in the industrial electric space, Eaton chose to start from scratch instead of buying its way into the EV market. That meant covering start-up costs as the eMobility division built out its technology and worked to win a space within the product lines of potential customers. The division continued to bleed red ink in 2022, generating sales of $139 million in the fourth quarter but posting a loss of $2 million. The operating margin was negative 1.3%.
As you might expect, this upstart division is Eaton's worst performer. While that's to be expected, there could be an important inflection point in 2023. Specifically, management is projecting organic revenue growth of between 30% and 40% for eMobility in 2023, with operating profit margins inching into the black somewhere between 2% and 4%. That performance will be a welcome improvement for eMobility, but still well below the company's other divisions, which have operating profit margins that are projected to fall between 16% and 24%, looking at the extremes across all of the divisions.
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Key Data Points
The key here, however, is that eMobility has made major business wins. Management tallies up $1.4 billion in contracts, with another $400 million alone in the fourth quarter of 2022. These are not one-time sales, however. These are contracts that play out over time, with Eaton supplying key parts to customers building electric vehicles on an ongoing basis. Notably, the division's sales, while modest relative to Eaton's top line, rose 58% year over year in the fourth quarter.
And once a part is added to a production line, it is likely to stay in the production line. This is because finding a replacement part would require manufacturing changes and the testing and approval of the part itself. It can be a long and difficult process to make such changes. This means that 2023 is likely to be the start of a long upward trend for eMobility with regard to revenues and profits as more and more of its products get put into EVs over time.
A changing history
Eaton's eMobility division is about to get a lot more exciting, but it is not and likely never will be the core of the business. That said, it is going to be a vital component in the company's efforts to offset the likely decline in one of its oldest divisions. For investors, the big takeaway is that Eaton is ready for the eventual end of the combustion engine because it has been using its strengths in the electrical space in a new way. Watch eMobility in 2023, as Eaton shows once again that it knows how to leverage its many strengths to change along with the world around it.
