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UPDATE 2-Eaton tempers profit view, dents hopes for vehicle spin-off
July 29, 2014 / 1:50 PM / 3 years ago

UPDATE 2-Eaton tempers profit view, dents hopes for vehicle spin-off

(Recasts, adds CEO comments)

By Lewis Krauskopf

July 29 (Reuters) - Eaton Corp tempered its full-year profit forecast on Tuesday due to weaker margins in its electrical systems business and dented some Wall Street hopes for a near-term spin-off of its vehicle business, sending its shares down 6 percent.

The U.S. manufacturer of power products and systems also said bookings fell 2 percent for its hydraulics segment, while second-quarter profit missed analysts’ target.

Eaton Chief Executive Officer Sandy Cutler said no “compelling” reason existed for portfolio transformation, amid speculation by some analysts that the company should seek to spin off the vehicle business, which makes turbochargers for cars and transmissions for trucks.

Eaton would face a “very significant” tax liability with any spin off, Cutler said, because of rules about making such a move within five years of its $11.8 billion acquisition of Cooper Industries, which was completed in 2012. The CEO also said the company gains benefits from applying its power technologies to multiple industries.

“There is not really a compelling economic rationale for further portfolio transformation, so we hope that provides some clarification” to recent questions from investors, Culter said on a conference call with analysts.

Eaton now expects 2014 earnings of $4.50 to $4.70 per share, lowering the top end from $4.90. Analysts on average had been looking for $4.73 for the year, according to Thomson Reuters I/B/E/S.

Eaton “lowered guidance for 2014 and that’s made investors somewhat nervous,” said Eli Lustgarten, senior vice president at Longbow Research.

Cutler said the lower forecast reflected weaker margins in the company’s major electrical systems and services segment.

The company lowered its overall margin target to 15.2 percent for the year from 15.75 percent previously.

The electrical segment is being hit by higher logistical costs and pricing pressures, according to the company.

Eaton’s net income attributable to shareholders fell 65 percent to $171 million, or 36 cents per share, in the second quarter ended June 30.

The latest quarter’s net income included charges related to acquisitions and litigation costs.

Excluding one-time items, earnings of $1.11 per share fell 2 cents short of the average estimate of analysts.

Sales rose 3 percent to $5.77 billion. Bookings in Eaton’s electrical products business rose 6 percent, while those in its aerospace unit increased 9 percent.

Eaton shares fell 6 percent to $72.17 in mid-day trading on the New York Stock Exchange. (Reporting by Lewis Krauskopf in New York and Sagarika Jaisinghani in Bangalore; Editing by Savio D‘Souza, W Simon and Bernard Orr)

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