Diversified industrial Eaton Corp (ETN) reported first quarter earnings of $1.64 (vs. $1.56 a year ago) after accounting for an $0.06 charge for acquisitions and integration of those acquisitions. Excluding those charges, Eaton earned $1.70 vs. the $1.66 street estimates. Eaton also raised full year guidance by $0.05 to between $7.30 and $7.80.

Eaton is diversified across several important industries with a diversified product line within those industries, making Eaton a good proxy on the economy. Driving earnings are Eaton’s 55% international exposure and extra strong strength in aerospace and ag equiptment. As expected, Eaton’s traditional markets such as autos and trucking remains weak, but the outlook for both autos and trucking is brighter going forward. Depressed auto business due to the recent strike has left pent up demand that should offset any loss caused by the strike. The trucking downturn is expected to bottom in the 2nd quarter and turn up in the 2nd half of the year.

Nonresidential Construction - Concerns too broadbased, opportunities exist

Problems in commercial real estate as expected. However, opportunities exist in mining, petrochemical, medical, manufacturing, and power generation.

“Many of you are appropriately concerned about lodging, office and commercial, well those make up about 35% of the private sector non-residential put in place market, and that’s using 2007 percentage of the actual market. Interestingly, if you look at the mining exploration, petroleum natural gas, manufacturing, power, which is power generating, healthcare, you come up to a total of just over 55% of the market, and each of those segments are growing at double-digit numbers and we see quite strong demand for the remainder of this year.

So I think, perhaps the missing piece of insight on this subject is that even if one’s forecast is that lodging, office and commercial weakens as we go up to this year and we think that’s an appropriate forecast to find what you really don’t see growth in those segments by the time you get to the end of this year. The power side, the medical side, the petrochemical side, we see having a longer opportunities for growth and a stronger double-digit and that’s what gets us to this overall forecast of middle single-digit growth in the non-residential North American market.” ~Alexander M. Cutler - Chairman and Chief Executive Officer; President (Eaton Q1 FY08 Conference Call)

Infrastructure - Bright spot in this downturn

“Jamie Cook - Credit Suisse: And then just checking, can you just comment on your thoughts about the Western European economy in general? I’m hearing more weakness in Spain and other leaders, a couple of smaller banks in Germany that went under… just sort of how you’re thinking about Western Europe and whether short of the credit issue spread to that area, and how it impacts your business?

Alexander M. Cutler - Chairman and Chief Executive Officer; President: Yes, I think the credit issue is one that I think is we’ve all watched the situation develop over the last four or five months, that we had to have our ear shut not feel that the credit markets are somewhat interlinked around the world. I think what we would say that there is a fundamental overestimation of that impact upon global growth is if a country’s growth rate is specifically tied to simply exports to the retail side of the U.S. economy, we have a very high conviction that that will be impacted negatively.

However, it’s a big part of the economy is tied to the, what I am going to call historically repress infrastructure investment, which now must be accelerated than a finite number of years, that is somewhat insulated, not fully insulated, but somewhat insulated from the credit market impact that’s kind of rolled out from here. So, as we think about important areas in Asia or important areas in Europe, specifically Eastern Europe and Russia, those markets aren’t backing off very much, and we’re seeing tremendous investment going on. I would agree with you that that Italy and Spain, and that’s not areas where we have very large operations in terms of end markets, they’ve been some of the markets that have been slower over the last several years, and they are continuing to be.”

Aerospace

“Moving to our Aerospace business, up 23% in terms of revenues from a year ago. First quarter operating profits of 16.3%, you remember our guidance for the full year here is 17% to 18%, again still feels realistic for the full year in that range. ”

“There obviously has pressured on retiring less efficient older aircraft and that does have a negative impact on after market and in the near term. ” ~Alexander M. Cutler - Chairman and Chief Executive Officer; President (Eaton Q1 FY08 Conference Call)

This concern on retiring older aircraft resulting in less after market replacement part sales might be true for Eaton, but this didn’t seem like the general view coming out of the JPMorgan Aviation and Transportation Conference. Most aircraft after market component suppliers also supply components for the new replacement aircraft, whether if the new aircrafts are the delayed 787 or the redesigned 747, all the component suppliers are excited to be involved. In fact, Honeywell was quite bullish on after market replacement parts as the delays in the 787 will cause older existing planes to run harder, requiring that much more maintenance and replacements. Honeywell’s outlook seems to be taking shape with all the recent inspection-forced flight cancellations (U.S. orders 3,130 Boeing inspections, Southwest Airlines abruptly grounded 41 planes in mid-March).

Electrical Equiptment - Stronger 2nd, 3rd, and 4th Quarter

“You’ll recall our full year guidance of 13% to 14% for this segment. We still feel that’s the appropriate guidance for this year and for those of you who have not followed our Electrical business as carefully. Remember there are two critical elements to think about in that full year guidance; one, is the normal seasonal where this business gets much stronger in the second, third and fourth quarter;” ~Alexander M. Cutler - Chairman and Chief Executive Officer; President (Eaton Q1 FY08 Conference Call)

Commodities/Steel Input Prices - Higher prices here to stay, commodities have pricing power

“Jeffrey Hammond - Keybanc Capital Markets: Okay, that’s good color. And then, just a follow-on on the raw material issue, back in ‘04-’05, when we saw spike in steel costs, lot of the steel companies were kind of ripping up contracts, implementing surcharges. Have you seen any of that near term that… similar to that or standpoint or it just seems like that spike was much bigger than anyone would have anticipated?

Alexander M. Cutler - Chairman and Chief Executive Officer; President: No, I think your insight there, Jeff, is correct at least with our experience. What we’ve seen really through the last 3 or 4 years is a continual discussion of pressure around commodity prices. So, it hasn’t backed out. We saw a lot of things written a couple of years ago, that several genome [ph], this is going to be a period of time when commodity prices are going to fall out and fall down, and I think you recall us being thorough agnostics on that subject. We felt that as long as you’ve seen worldwide demand strength, you’re going to continue to see high commodity prices and suppliers have been talking about that pressure. So, no I would say this has been much more of a continual conversation, not a one-time spike.”

This first glance Eaton gives us tells us the playbook hasn’t changed. Stick with the industrial multinationals. I believe the look Eaton gave us is better than the dismal report by GE. Sure GE is diversified, but diversified into the toxic financial sector, masking any positives in the industrials and infrastructure that Eaton showed us. If other industrial multinationals such as Ingersoll-Rand and Honeywell can confirm Eaton’s strong export story, I think you can dip into a variety of industrial exporters. Even the mid and small caps should be on the radar if you do your homework and know they’re selling into the strong markets such as those Eaton emphasized.

**Disclosure: I own shares of HON as of this post.**

This entry was posted on Tuesday, April 15th, 2008 at 1:17 am and is filed under Engineering, Gov\'t & Utilities, Oil & Energy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.