Tuesday, KeyBanc Capital upgraded Eaton Corp. (ETN) shares to Buy from Hold with a price target of $80. The brokerage increased its 2010 EPS estimate to $4.15 from $3.85, while establishing its 2011 estimate of $5.50.
Analyst Jeffrey Hammond upgraded the stock following his first look at ETN's 2010 guidance and based on what he views as meaningful cushion at the start of an earnings acceleration. The company's end markets appear to be on the front end of a recovery at large, and the analyst believes the bear case for the late cycle-tagged Electrical business has played out without incident.
Specifically, the analyst believes margin resiliency has been impressive near term and shows promise for further expansion with incremental volumes in 2010. Coupled with materializing stimulus funds domestically and a top-line reacceleration in emerging markets, the analyst believes ETN has set readily achievable expectations to start the year.
Given near-term execution in the other segments, the analyst believes a tone of conservatism rings throughout the company's assumptions. Specifically, the analyst sees room for upside in Electrical, Truck and Auto margins, as well as some conservatism in Auto market assumptions. The analyst sees compelling earnings growth carrying into 2011 on Truck, Mid/Late-Cycle Market Recovery.
Beyond the 2010 trajectory, the analyst believes ETN is poised for a further earnings ramp in 2011 at the onset of a NAFTA heavy truck replacement cycle, which is largely absent from the current year outlook, as well as early-stage recovery in its later-cycle markets. In light of a compelling earnings growth story and a path to consistent beat-and-raise scenarios, the analyst upgraded the stock to Buy.
Currently, ETN is up $0.51 or 0.79% and trading at $65.09.
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