Eaton Earnings: Margin Progression Prompts Us to Increase Our Valuation

Narrow-moat-rated Eaton put forth a solid third-quarter effort. Revenue of $5.88 billion was right in line with our expectations, but segment operating margin of 23.6% materially exceeded what we penciled in. These results, coupled with the company's higher guidance, prompted us to lift our midcycle operating margin estimate by 50 basis points. Eaton’s margin progression is so far ahead of its 2025 target that the goal now looks laughably low. We think high-single-digit long-term revenue growth driven by infrastructure-related spending and the aerospace recovery should translate to strong operating leverage. Even modest operating leverage means Eaton should hit close to a 23% operating margin by 2025. These changes caused us to raise our fair value estimate to $206 per share from $195.