Eaton Corp (NYSE:ETN) reported fourth-quarter operating earnings of $1.17 a share, ahead of analyst expectations for $1.10. Revenues were in line with expectations at $5.1 billion. That said, earnings fell 8% year over year, with the top line sliding 9%. So good in some ways, but bad in others. But the real takeaway from the quarter is what Eaton is doing in the face of a tough business environment.
A rough year
The fourth quarter was a weak end to a tough year. For all of 2015, Eaton's top line, which at $20.9 billion was in line with analyst estimates, fell roughly 7.5%. Currency headwinds accounted for about 5.5 percentage points of that, with organic revenue declines responsible for the remaining 2 percentage points. The latter is a function of slowing global growth. Operating earnings, excluding one-time items, meanwhile, were $4.30, besting analyst expectations and up from a year ago. The problem, however, is that the business environment got worse and worse as 2015 progressed.
In fact, the fourth quarter saw revenue declines in each of Eaton's business lines. The worst-performing segment remains hydraulics, where sales slipped 18%. This group continues to struggle with falling demand for heavy machinery, like mining and farm equipment. That's not surprising at all if you look at the sales plunge at equipment makers like Caterpillar and John Deere, where the top lines have been in a broad downtrend for more than a year because of falling commodity prices. But weakness at Eaton was across the board, and, to put it simply, it was bad all around. Overall, currency was responsible for 5 percentage points of the quarter's 9% revenue decline, with an organic sales decline accounting for the remaining 4 percentage points.
|Segment||Q4 YOY Revenue Change|
|Electrical Systems and Services||(9%)|
And, now that 2016 is getting under way, Eaton is calling for organic revenue to decline between 2% and 4% in 2016. Add another 2% for currency headwinds and 2016 will be another tough year. At this point, CEO Alexander Cutler anticipates that "2016 will be the second consecutive year of decline in our end markets, the first back-to-back decline in our end markets since the industrial recession of 2001-2002." That's certainly offering up a less than auspicious start to the year.
But Eaton isn't sitting still. It started to cut costs in the middle of 2015, when the business environment began to slow, by trimming staff and shutting facilities. It expanded that program in the third quarter. And it just announced that it is expanding it again. Eaton is now expecting its cost-cutting efforts to total $400 million between 2015 and 2017, with an expected annual savings of roughly the same amount once the cost cuts are fully in place. So, in the face of a difficult market, Eaton is working hard to align its various businesses with the market environment.
Another interesting effort is the company's plan to focus on stock buybacks. Cutler explained: "[W]e expect to continue to deploy the bulk of our excess funds to share repurchases." It's actually kind of refreshing to see a company buy its stock back when the stock is cheap, even if investors would probably prefer the stock price to be higher. The industrial conglomerate spent nearly $700 million of its $2.4 billion in cash flow on its own shares in 2015, buying about 2.4% of its outstanding shares. Its goal is to spend roughly $3 billion between 2015 and 2017 on stock buybacks, so there's a lot more buying ahead.
Still very profitable
Yes, Eaton had a tough 2015, and 2016 looks like it will be difficult, too. But it's working to adjust to the environment, and buying back stock along the way while the shares are in the market's doghouse. However, even in a difficult market, the company is projecting operating earnings for 2016 to be between $4.15 and $4.45 a share.
The midpoint of that suggests essentially flat year-over-year earnings. But flip that around a bit, and even in a bad year, Eaton's earnings are substantial and deep in the black. It's kind of hard to complain about that, especially when the shares have a yield around 4.5%. Getting paid to wait for an industrial upturn from a large, diversified, and still quite profitable industrial giant may not be such a bad deal for conservative investors.