If you've ever used electricity, which is highly likely since you're reading this on a computer screen, you've benefited from the work of an electrical equipment company. Electricity is one of the key technologies that make the modern world possible. Companies such as General Electric Company (NYSE:GE), Eaton Corp. plc (NYSE:ETN), and ABB Ltd. (ADR) (NYSE:ABB) provide the products used to handle and use electricity. All three are worth watching in the electrical equipment space.
An industrial giant goes back to its roots
General Electric is one of the best known brands in the world, and a key part of its business is making the equipment that creates, handles, and uses electricity. But GE is so much more than just that, which is what makes the company so interesting to many investors. It's also gotten GE into trouble in the past.
For example, leading up to the 2007-to-2009 recession, GE allowed its finance division to grow disproportionately large. And when the financial-led recession hit, GE had to cut its dividend and take a government bailout. It was an ugly time for the diversified giant, but management learned from its foibles and has since been trimming back to its core industrial focus.
That means making things as monolithic as windmills and as inconspicuous as power supplies and switches. That said, because GE is so large, it's really hard to pick out a percentage of its business that is best classified as electrical equipment. But expertise in electrical equipment is pervasive through much of what the company does, from serving the oil and gas industry to building jet engines.
Essentially, General Electric is a giant industry player but reaches well beyond the bounds of electrical equipment. That makes it something of a "punt" option on the space for those seeking diversification. If you want more direct exposure to electrical equipment, you'll want to look at companies such as ABB and Eaton Corp.
A little more direct
Eaton generates around 60% of its revenues from electrical products of some sort. The segment is broken down into two distinct pieces: electrical products, and electrical systems and services.
Like GE, it has other businesses, too. In this case, however, it's a smaller list, composed of aerospace, hydraulics, and vehicles. But even here, the key focus is power management. While that may not always mean electricity, more often than not it does. Key customer groups for Eaton on the electrical products side include utilities, residential products, governments, and data centers, among others.
Industrial growth is a key factor to watch for Eaton, since its customers are businesses. This is a key factor at GE, too, but GE spans other areas, including finance, that will push results around, even though it is increasingly streamlining its business.
Another key issue to monitor for Eaton and GE's industrial businesses is backlog or bookings. Essentially these are the orders the companies have lined up for the future. Large and growing is obviously the most desirable thing to find here. Backlog can often help predict the direction of future results.
If you like foreign accents
ABB is also affected by these issues and is another company to watch in the space. It describes itself as a power and productivity business. It breaks its operations down into five segments: power products, power systems, discrete automation and motion, low voltage products, and process automation. ABB is roughly similar to the two other companies, but there's a key difference at ABB: It's less levered tp the US market.
While Eaton and GE are both global companies, each generates around half of its revenues from the United States. ABB, on the other hand, gets only about a third of its top line from the Americas, which includes Canada, Mexico, and all of South America in addition to the United States. So if you're looking for international exposure, ABB will be the type of electrical equipment company you'll want to be watching. Just make sure you pay more attention to global growth trends.
Making the world go round
Electricity is simple to understand but much more complex to work with. And experts such as GE, ABB, and Eaton are the companies that other companies turn to when they need to make electrical things work. These are three names you'll want to watch in the electrical equipment space.
GE is a globally diversified giant with tentacles reaching well beyond the sector, which makes it a good diversified option if you want exposure to electrical equipment but other areas, too. Eaton is far more focused but derives most of its business from the U.S. market, which is why ABB might also be of interest, since the United States is a relatively small part of its geographic exposure.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.