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Morningstar | Near-Term Headwinds in Two of Eaton's Segments Don't Alter Our Long-Term View

We think of Eaton as a specialized producer of highly engineered products and services. These offerings are designed to solve customer pain points in vital portions of the world’s infrastructure. We believe Eaton has effectively positioned its portfolio in profitable niches that should benefit from secular trends and propel long-term growth. Eaton’s portfolio can be divided into two portions--its more legacy Industrial Sector and its Electrical Sector, which in our view was strengthened with the acquisition of Cooper Industries in 2012. Eaton’s Industrial Sector serves a variety of end markets and houses its Hydraulics, Aerospace, and Vehicle segments, while its Electrical Sector consists of its Electrical Products and Electrical Systems and Services segments. Eaton’s products compete in the differentiated portions of its end markets, which we think reduces the risk of commoditization. Moreover, many of its end market solutions are mission-critical, as in fuel pumps with aerospace or uninterruptible power supply in hospitals. Others lower customers’ total cost of ownership or compete in industries with a high cost of failure, as with its hydraulic hoses used to irrigate golf courses’ fairways and greens.In 2018, the company created a new segment, eMobility. This new segment aims to take advantage of the secular trend toward electric vehicles, and we believe the company can leverage its technology core competency from its Electrical Sector, while taking advantage of its OEM relationships in its Vehicle segment. We also believe Eaton will benefit from additional secular trends, including increasing environmental and safety regulations, cybersecurity threats, less available skilled labor in developed nations, and upgrades to aging infrastructure, among other factors. While ROICs have dipped since the Cooper acquisition, we believe they can (and are starting to) return to normalized levels by the end of our explicit forecast given a cyclical upswing in certain end markets, benefits from a three-year restructuring in its Hydraulics segment, improvements to operating efficiency from reduced assemblies, and additional wins in businesses like eMobility.