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Eaton Corporation (ETN 0.27%) It had a good year in 2022, with record adjusted earnings per share of 7.57, up 14% year over year. The company’s move a few years ago to increase its focus on industrial electrical products was a key driver of this performance. Following the trends, the company created a division focused on the electric vehicle market. This section is He had a good year in 2022, but will really start to shine in 2023.
100 years ago
Eaton traces its history to 1911 to making axles for gear-driven trucks. It has changed a lot over the years with businesses adding and subtracting. Over the past decade, he has focused on controlling power in a variety of ways, including in the automotive, aviation, and electrical fields. However, the biggest move was the 2012 acquisition of Cooper Industries, a transformational acquisition that cost $13 billion.
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Today, after shedding some less desirable businesses, Eaton has five divisions: Electric America, Electric Global, Aviation, Vehicle and Immobility. In the fourth quarter of 2022, the two electric segments will account for nearly 70% of sales. Aviation was around 15% of sales, and the vehicle was 13%. This makes eMobility the rest or less than 3% of sales.
Clearly, the company’s two electrical divisions are the driving force behind the business. And aviation is a good business that is expected to show strong long-term growth. Aviation posted all-time records for sales and operating profit in the fourth quarter, and backlog grew 21 percent, suggesting continued strong results.
The vehicle segment, on the other hand, tends to be highly cyclical. And as the world increasingly shifts to electric vehicles, it’s facing a long-term headwind of materials, which is why Eaton created its Immobility division a few years ago. The hope is that this new segment will grow even as the older vehicle business begins to decline.
From the ground
With a strong presence in the automotive industry and a strong position in the industrial electrics space, Eaton chose to start from scratch rather than buy into the EV market. This means covering start-up costs as the immobility division builds its technology and works to win a place in potential customers’ product lines. The class It continued to bleed red in 2022, generating $139 million in sales in the fourth quarter, but posting a loss of $2 million. Operating margin was negative 1.3%.
As you might expect, this debut episode is Eaton’s worst performance. While this is expected, there could be an important realization point in 2023. Specifically, management is projecting organic revenue growth of 30% to 40% for Immobility in 2023, with profit margins entering the black between 2% and 4%. That performance would be a good improvement for eMobility. But it’s still below other parts of the company, with profit margins estimated to fall between 16% and 24%, looking at the extremes across all divisions.
But the key here is that eMobility has made major business wins. Management raised $1.4 billion in contracts, with only another $400 million in the fourth quarter of 2022. But these are not one-time sales. These are contracts that play out over time, with Eaton continuously supplying key components to customers building electric vehicles. In particular, the segment’s sales rose 58 percent year-over-year in the fourth quarter, albeit modest relative to Eaton’s top line.
And after a part is added to the production line, it can remain in the production line. Because finding a replacement part requires manufacturing changes and testing and approving the part itself. Making such changes can be a long and difficult process. This means that 2023 could be the start of a long upward trend for eMobility in terms of revenue and profits as more and more of its products transition to EVs.
A changing story
Eaton’s immobility division is about to get more interesting, but it can’t and won’t be a core part of the business. That said, it will be a critical component in the company’s efforts to mitigate the potential failure of one of its oldest divisions. Eaton, which takes the biggest place for investors, is ready for the end of the combustion engine, as it uses its strength in the electric environment in a new way. Look out for eMobility in 2023 as Eaton once again demonstrates how to use its many strengths to change with the world around it.
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