UPDATE 2-Eaton 4th-quarter profit tops forecasts

(Adds CEO comment, details on company forecast, analyst comment)

NEW YORK, Jan 22 (Reuters) - Diversified manufacturer Eaton Corp (ETN.N) posted a higher-than-expected quarterly profit on Tuesday, citing strength in its electrical and hydraulic businesses, the benefit of recent acquisitions, and a lower tax rate.

The company, which serves markets ranging from aerospace to construction and heavy-duty trucks, also forecast a 25-percent sales increase, driven by acquisitions, and 15-percent profit increase this year.

Eaton's Chief Executive said the company's forecast was based on the expectation that a series of Federal Reserve rate cuts would spur a recovery in U.S. industrial production in the second half of the year.

"With all the rate decreases getting traction, and this morning's additional 75 basis point cut, further solidifies the likelihood of a recovery in the second half," Alexander "Sandy" Cutler said in an interview.

Net income in the fourth quarter rose 6 percent to $256 million, or $1.71 a share, from $241 million, or $1.59 a share, a year earlier.

Adjusted for acquisition and integration-related charges, the Cleveland, Ohio-based company earned $1.75 a share, which was 2 cents ahead of Wall Street EPS forecasts, according to Reuters Estimates.

Sales were up 10 percent to $3.37 billion, also higher than expected.

In October, the maker of everything from electrical switch boards to truck transmissions had forecast a fourth-quarter net profit per share of $1.60 to $1.70. Before one-time items, it had expected $1.65 to $1.75.

Eaton expects its biggest business, the electrical segment, to grow 4 percent this year, while its aerospace markets should grow by at least 5 percent and heavy-duty trucks should be up about 8 percent during the year.

Acquisitions are expected to account for about 17 percentage points of the expected 25-percent sales increase this year, Cutler said.

Last month, Cleveland-based Eaton offered to buy the Moeller Group, a German electrical components maker, for $2.2 billion and said it launched a tender offer for Taiwan-based Phoenixtec Power Co Ltd 2411.TW, which makes uninterruptible power supply systems, worth about $565 million.

Eaton completed nine deals in 2007. Future acquisitions will serve to grow its aerospace and industrial businesses, Cutler said, but in the near term the company will focus on integrating new businesses "ahead of doing many more deals."

The company, which also raised its quarterly dividend 16 percent to 50 cents per share from 43 cents, said it expects first-quarter operating earnings per share in a range of $1.60 to $1.70 and 2008 operating earnings of $7.75 to $8.25.

Analysts expect the company to earn $1.67 per share in the first quarter before special items, and $7.67 for the full year, according to Reuters Estimates.

Eaton shares -- which fell as much as 9 percent near the opening to their lowest level in a year, tracking broad weakness in U.S. stock markets -- were down $1.09 or 1.3 percent to $79.99 in afternoon trading.

Merrill Lynch analyst Andrew Obin, with a $115 price target on the shares, said the company is trading at a discount to its industrial peers.

"We think the stock's current valuation is compelling given healthy fundamentals going into 2008 and accelerating EPS growth," he wrote in a research note. (Reporting by Nick Zieminski, editing by Gerald E. McCormick)