Eaton shares fall as oil casts pall over earnings increase

An Eaton exec told The Associated Press that the company had expected its North American heavy-duty truck market to grow in the second half of 2008, but that view has been revised. Pictured, the Eaton UltraShiftLST transmission.

By M.R. KROPKO
The Associated Press

7/16/2008

CLEVELAND — Shares of Eaton Corp. fell Tuesday after the maker of aircraft, auto and truck parts warned that high oil prices will hinder its growth in the second half of 2008.

The news overshadowed a 35 percent earnings increase in the company’s latest quarter.

Alexander M. Cutler, Eaton chairman and chief executive officer, told analysts in a conference call the high oil prices are a drag on some of the company’s businesses, such as aerospace and automotive.

He said customers’ willingness to absorb surging energy costs began to falter in May.

“We saw a dramatic turndown in the North American retail sales for passenger cars. We saw flattening of heavy-duty truck demand. We saw a contraction of U.S. airline fleets here in the U.S., trying to retire less fuel efficient aircraft,” Cutler said.

Oil prices have swung violently in recent days as they flirt with record highs. At midday, Tuesday, light, sweet crude fell $6.27 to $138.91 a barrel.

Shares of Cleveland-based Eaton, which dropped as much as 14 percent during midday trading, closed down $5.42, or 6.8 percent, at $74.47 Tuesday.

Meanwhile, Eaton announced second-quarter results that topped Wall Street expectations.

It earned $333 million, or $2.03 per share, in the quarter ended June 30, compared with $246 million, or $1.64 per share, a year earlier. Excluding charges, Eaton earned $2.10 per share in the latest period.

Sales rose 32 percent to $4.28 billion, as a strong performance in its growing electrical businesses offset market pressure on auto and truck segments.

Analysts had expected profit of $1.94 per share on sales of $4.14 billion, according to a Thomson Financial survey.

Cutler told The Associated Press that the company had expected its North American heavy-duty truck market to grow in the second half of 2008, but that view has been revised.

Eaton sells drivetrain and safety systems to fleet owners, freight companies and truck manufacturers.

“We think recovery has been pushed out until 2009 because of the higher fuel prices. We’re very well sized at the present level. We had return on sales 15 percent in the quarter in that business, which is very attractive at a low point in the market,” he said.

Eaton’s electrical ventures are focused on power distribution, control and quality. They serve industrial, utility and construction markets.

Looking ahead, Eaton reduced its 2008 adjusted profit forecast by 20 cents per share, to net income of between $7.20 and $7.50 per share, and operating earnings per share of $7.70 to $8.00. Analysts’ expectations, on average, were $7.85.

Cutler said the projection of weaker than expected full-year results is due mainly to high oil prices. Eaton expects its international markets to show more growth than those in the United States.

Eaton experienced low levels of shipments in automotive, truck and aerospace businesses in the second quarter, but the company was able to offset that with stronger results in hydraulics, or various kinds of pumps, and electrical products and systems, the company said.

Through the year’s first half, Eaton earned $580 million, or $3.69 per share, up from $480 million, or $3.20 per share, in the first six months of 2007.

Sales during the half totaled $7.78 billion, compared with $6.37 billion in 2007’s first half.

Eaton in April completed the purchase of The Moeller Group. The Moeller Group, based in Bonn, Germany, is a supplier of components for commercial and residential builders and industrial controls.

Eaton has 79,000 employees and sells products to customers in more than 150 countries.