Investor Day Builds Bullish Outlook for This One-Rated Intelligent Power Holding

Coming off Eaton’s ETN Investor Day and following our comments in today’s Daily Rundown video, we are reiterating our $400 target and our one rating.

Over the last few quarters, we’ve read quite a bit about data center construction expectations over the next several years and AI/data center capital spending by Big Tech. During Eaton’s set of management presentations on Tuesday, the company reiterated its March quarter and 2025 guidance and shared its growth and earnings roadmap through 2030. Backing up its March quarter is the company’s $15 billion backlog, of which is only and firm data center commitments that power its key reporting segments, Electrical Americas (47% of sales, 60% of operating profit) and Electrical Global (25% and 18%). Thinking about that backlog, Eaton’s total revenue in 2024 was $10.8 billion, so we would argue its visibility over the coming quarter is rather good.

As we discussed in our December quarter earnings writeup, exiting 2024, the construction mega-project backlog stood at $2.4 trillion with just 15% of projects started in the last 12 months. According to the latest CommercialEdge industrial report, 100 million square feet of industrial space is under development in the U.S., including Hyundai’s $5.9 billion, 17 million-square-foot EV plant in South Carolina, and with Dallas-Fort Worth at the forefront, reporting 22.56 million square feet under construction. Phoenix follows with 17.67 million square feet, while Houston and Memphis, Tenn., have 13.17 million and 11.72 million square feet, respectively. Viewed another way, the backlog of North American mega projects, defined as building projects with a budget of more than $1 billion, hit $1.9 trillion at the end of 2024, up 33% from 2023. Those and other mega projects also continue to keep us bullish on United Rentals URI and Vulcan Materials VMC.

Laying out its roadmap through 2030, Eaton’s outlook calls for relatively steady growth between 6% to 9% organically as AI/data center construction backed by rolling five-year customer forecasts and the updating of the U.S. electrical grid. Roughly 70% of that grid is over 25 years old, which in and of itself should foster an upgrade cycle. Accelerating that is the expected rate of electricity consumption growth forecasted by the Department of Energy. Between data centers, EVs, energy storage, buildings and other factors driving growth behind the meter means more power is needed in front of the meter. Putting its arms around that, the DOE sees electricity demand rising 3% this year, growing by 15% to 20% in the next decade, and doubling by 2050.

It’s that multiyear tailwind we aim to capture by owning ETN shares in the Portfolio.

On top of that revenue driver, as volumes improve and Eaton reaps the benefit of AI productivity, it targets growing its overall operating margin to 28% or more over the coming years. Where is Eaton implementing AI? Management shared examples across engineering, IT, finance, human resources and for its supply chain. Stepping back, Eaton’s guidance calls for about 350 basis points of improvement over the next several years on top of the 40 basis points to 80 basis points of improvement flagged for this year.

Our initial reaction is that, subject to the economy and tariffs, that could be a somewhat aggressive long-term forecast, but even if Eaton captures just over half of that targeted margin expansion, coupled with revenue growth, it should still deliver meaningful profit and cash flow growth.

For that cash flow, Eaton shared it targets a dividend payout between 30% to 50%, suggesting further dividend increases are on the horizon. When asked about the range of that target, management conceded it wants some flexibility for either stock buybacks or M&A. M&A would be gravy for the growth outlined above, and like other companies in the Portfolio, Eaton is a seasoned integrator of acquired businesses. The focus on such activities would be EPS accretive bolt-on acquisitions that expand its product reach and scope.

Eaton's latest acquisition of Fibrebond Corp. was announced on Tuesday. The company, which offers pre-integrated modular power enclosures for data center, industrial, utility and communications customers, generated sales of around $378 million for the 12 months ending February 2025. At roughly 3.5% of Eaton’s 2024 revenue, that qualifies as a bolt-on acquisition. What we like is the 29% adjusted EBITDA margins before being acquired by Eaton, which leaves room for further improvement as the business is Eaton-ized and subject to cross-marketing efforts.

With the fundamental outlook sound, on Thursday we’ll have a technical look at the shares.

More Pro Portfolio

At the time of publication, TheStreet Pro Portfolio was long ETN, URI and VMC.