Data Center Demand Prospects Keep This Holding 'Electrifyingly' Interesting
As folks look past the June quarter, investor interest is likely to return. Here's why and the key price levels to watch.
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In the last few months, no matter how strong underlying fundamentals or quarterly results may be, if a company delivers even a modest shortfall relative to market expectations, we see its shares move lower. Indeed, that was the case Friday with TheStreet Pro Portfolio holding Eaton ETN.
Even though Eaton delivered March-quarter results that were slightly ahead of Wall Street forecasts and reiterated its 2025 EPS guidance of $11.80-$12.20, its EPS outlook for the current quarter of $2.85-$2.95 fell short of the $2.98 consensus. That shortfall reflects the incremental headwind associated with tariffs, which is impacting Eaton’s Electrical Americas business and even more so its Vehicle business (10% of sales, 6% of operating profits). Despite those headwinds, based on the continued strength in its order book, one that reflects vibrant data center and utility demand for its electrical business, Eaton raised its 2025 organic revenue growth forecast by 50 basis points to 7.5%-9.5%.
During the company’s earnings call, management shared U.S. data center construction backlog now stands at nine years based on the 2024 build rates, up from seven years exiting 2024. Outside the U.S. it noted strong activity in the EMEA and APAC regions as well, which is not surprising given what we’re reading about global data center construction. Those stats back up what we are hearing from Big Tech companies as they reiterate their AI and data center capital spending plans. As we see the mix shift in that industry move toward AI data centers, we should see Eaton’s dollar per megawatt content rise given greater power density, larger volumes of electrical equipment and also greater cooling requirements. Connecting the dots, we see that as a nice confirmation of multiple holdings in the Pro Portfolio.
Following the strong rebound in ETN shares from their $250 low in early April, we are not surprised by the initial reaction to the company’s June-quarter guidance. However, it overlooks the robust outlook for the vast majority of the company’s revenue stream. In addition to what we’ve discussed for its electrical business, backlog at its Aerospace segment (15% of sales and profits) grew double-digits year over year and stands to benefit from rising defense spending across the globe.
As folks look past the June quarter and focus on the multi-quarter prospects for what’s ahead, investor interest is likely to return. Should we see any reversal in auto-related tariffs, that would be a nice catalyst for ETN shares.
However, we do see layers of resistance ahead for the shares near $309 and $316. Given the growing potential for the Fed to push back on rate-cut timing next week, following what we saw in the April ISM Manufacturing Report and today’s stronger-than-expected April Employment Report, a more compelling pick-up point for this One-rated name would be closer to $290. Even more so closer to $282.
At the time of publication, TheStreet Pro Portfolio was long ETN.
