(Reuters) - Diversified manufacturer Eaton Corp (ETN.N) issued a forecast for 2014 just within analysts' estimates, but reported disappointing quarterly profit margins on Tuesday, sending shares down more than 3 percent.
The maker of electrical and hydraulic systems reported a fourth-quarter operating profit of $1.08 per share, exceeding analysts' estimates by 2 cents. But this was due to an unexpected tax benefit that obscured underlying weakness in its results, analysts said.
"The quarter basically benefited from a much lower-than-expected tax rate," said Mig Dobre, an analyst at Robert W. Baird.
He said the tax benefit added 16 cents per share compared to his estimate, while operating income fell 22 cents short of his expectation.
"From an operating standpoint, margins were frankly shy of what was guided and what was expected," Dobre said.
Noting the boost from lower-than-expected taxes, Sanford Bernstein analyst Steven Winoker characterized the quarterly results as an "operational miss."
The company said the tax benefit related to the closing of its acquisition of Cooper Industries.
Dobre said the company's 2013 profit margin was 14.9 percent compared to the 15.25 percent the company projected in October.
In an interview, Eaton Chief Executive Officer Sandy Cutler said a main reason for the lower-than-expected margins stemmed from costs tied to introducing new products in its vehicle segment, while its electrical and aerospace segments came in below margin targets as well.
The company said fourth-quarter net income rose to $479 million, or $1 per share, from $179 million, or 46 cents per share, a year ago. The year-earlier quarter included costs related to the acquisition of Cooper.
Excluding items, Eaton earned $1.08 per share, 2 cents better than the average analyst estimate, according to Thomson Reuters I/B/E/S.
Revenue increased 28 percent to $5.53 billion, while analysts looked for $5.55 billion.
Most of the sales increase came from acquisitions, while Eaton's base business increased 4 percent.
"We had the strongest volume quarter, in terms of organic growth, that we had in any quarter" in 2013, Cutler said.
Eaton expects earnings in a range of $4.50 to $4.90 per share for 2014, excluding acquisition-related charges, or an increase of 9 percent to nearly 19 percent. Analysts' expectations were at the higher end of that range, at $4.88 a share.
Dobre said the forecast "at first glance appears conservative."
Eaton said it anticipated its markets would grow by 3 percent this year.
Cutler said the company is projecting that overall manufacturing and industrial production will rise at a faster clip than the global economy in 2014, which he said would increase about 3 percent.
"That's a better environment obviously than we saw in '13," Cutler said. "The big change really comes from Europe," which will grow somewhat in 2014 after being a drag on the economy last year, he said.
Eaton shares were down 3.2 percent to $68.01 in afternoon trading on the New York Stock Exchange.
Reporting by Lewis Krauskopf in New York and Mridhula Raghavan in Bangalore; Editing by Bernadette Baum and Grant McCool