Diversified manufacturer Eaton
Leading the charge higher, as it did last quarter, were the company's truck segments, which represented 21.5% of total sales this quarter, a 24% increase over the same period last year. But while trucks make up the third-largest unit of the four reporting segments based on sales, they're also the company's leading profit contributor. In that regard, the trucks segment didn't disappoint -- it turned in a 28% increase in operating income this quarter.
Also beefing up results was the electrical business unit -- Eaton's global switch and circuit breaker business. Although it is the largest unit as measured by sales, making up 35.1% of total sales, margins had been a problem. Not this quarter, though. Operating margins, before restructuring charges, expanded 3.3 percentage points to 11.35%, setting a quarterly record for electrical. A 12.5% increase in sales led to a whopping 58.6% jump in operating income.
The fluid power business, hurt by droughts around the world that have crimped demand for hydraulic systems and components for agricultural equipment, saw sales increase by a tiny 2%, while operating profit actually fell 9.9%. The automotive segment, in which Eaton supplies the global passenger car and light truck market, reported a 1.4% increase in sales and flat earnings.
Last quarter, the company upped its earnings guidance by a dime to between $5.00 and $5.20 a share. Today, the company raised the lower end of guidance by another dime. So at the low guidance of $5.10 a share, the stock is trading at 11.7 times 2005 estimated earnings. That's a very reasonable multiple for a company that analysts expect to compound earnings by 12% annually for the next five years.
Compared with competitors, Eaton is value-priced. ITT Industries
Eaton's stock is down about 8% from where it was 52 weeks ago. That is probably a reflection of the market's concern over the effects of higher oil prices and the potential impact, particularly at its truck and automotive units as sentiment regarding consumer spending changes might reasonably affect the business investment climate. But the company's $1.24 dividend represents a 27.5% payout ratio to expected earnings per share. That payout seems safe, and at current earnings levels, it could even be increased.
Are you looking for great companies? Let Motley Fool co-founders David and Tom Gardner find the next big winner for you. Subscribe to the Motley Fool Stock Advisor newsletter today.