'Likely Bottleneck' Keeps Us Bullish on This Holding

Now that we’ve shared our views on Palantir (PLTR) , let’s turn our gaze to this morning’s earnings report from Eaton (ETN) and the subsequent move lower in those shares.

Before we do that though, let’s consider comments from Big Tech last week that AI and data-center demand continues to outstrip supply, leading them to signal we will see another leg up in capex levels next year. This tells us capacity will move higher, but it also means the electricity demand will do the same, and at a quicker clip than some may have expected. So, it stands to reason that electrical capacity is a likely bottleneck that needs to be addressed, and you know, identifying and capitalizing on pain points is one of our investing strategies.

What Do We Know?

Eaton delivered September-quarter EPS of $3.07, a few pennies ahead of the $3.05 market consensus, and up high single digits compared to the $2.84 posted in the year-ago quarter. September-quarter revenue rose 10%, year over year, to $7.0 billion, a tad shy of the $7.07 billion consensus, as gains in its electrical and aerospace segments were mitigated by year-over-year declines in its Vehicle and eMobility segments.

In our October Monthly Roundup, we discussed likely headwinds for the Vehicle segment. However, as we’ve crossed into November, new Section 232 tariffs for medium and heavy-duty trucks should reduce tariff costs. We still see headwinds ahead for eMobility, which houses Eaton’s exposure to EVs, but at 2% of year-to-date revenue, it’s arguably just above a rounding error for the company.

And even though the company did beat the September-quarter bottom-line by a few pennies, Eaton “only” reiterated its 2025 adjusted EPS guidance of $11.97-$12.17, which bookends the $12.09 market consensus and is up ~12% year over year at the midpoint.

In the eyes of the market, it was not a picture-perfect quarter given the ever-so-slight top-line miss and EPS reiteration, but as we discussed coming into the current earnings season, the odds were high that unless a company delivered a meaningful beat-and-raise quarter, not just a beat-and-reiterate one, its shares were likely to come under some pressure. Hence, what we are seeing today, but with that in mind, we will keep a close watch on the 100-day moving average near $364.

What we also know in sifting through the company’s earnings presentation and conference call is that it continues to benefit from data-center demand. Per management, data-center orders for its electrical business were up ~70% in the September quarter, and backlog for its Electrical America’s segment was up $2 billion or 20% year over year. And as we discuss backlog, we’ll toss in that figure for Eaton’s Aerospace business was up 15% year over year exiting the September quarter. Better days ahead for that segment as well.

Now, what those figures do not include are some of the big AI and data-center announcements we’ve witnessed over the last 35 days, which means Eaton's backlog is poised for another move higher when it reports the current quarter. That September backlog figure also doesn't include Eaton’s acquisition of the Boyd Thermal business yesterday. Roughly 80% of Boyd’s business supports its data-center segment, according to Eaton, which implies the company is positioned to pick up more content dollars per data center. Initial expectations are that the Boyd business will bring in ~$1.7 billion in 2026 with an adjusted EBITDA margin near 25%.

What Does This Tell Us?

What this tells us is that the demand for Eaton’s electrical business is poised to be even stronger than the comments and figures discussed today. So, while Eaton shares may be down, the outlook remains bright.

As we see how ETN shares settle out in the next few days, we’ll corroborate our thinking with capex comments across electric-utility companies. Our suspicion is they will be very confirming for why we own ETN in the Pro Portfolio.

In terms of our $420 price target, we see a good path to that, and as we get more detailed integration plans for the soon-to-be-acquired Boyd business, we’ll revisit it as needed. Should the wave of big AI and data-center deals continue, that is something that could lead to some price-target tweaking before year-end.

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