Reiterating Our Price Target for This Name Amid Mega Project Strength
Data center demand is robust but, it’s only a small part of mega project activity.
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On the heels of Eaton Corp.’s ETN December quarter results and earnings conference call, we reiterate our $400 price target on the shares. The company reported a $0.02 per share beat with EPS of $2.83, up 11% year over year on revenue that rose mid-single digits to $6.24 billion, a tad below the $6.3 billion consensus. Sales for the quarter, much like we are seeing at other multinational companies, were impacted by currency headwinds, which sapped quarterly sales by around 1%. Eaton’s sales in the quarter were also impacted by Hurricane Helene, which was expected to be a headwind in the December quarter.
While the company delivered guidance for the current quarter of EPS between $2.65 and $2.70 that bookends the market consensus, we are encouraged by Eaton’s continued shift in business mix toward the higher-margin electrical business. That’s especially true with the company’s Electrical America’s business, which sports the highest operating segment margins at Eaton. The outlook for that business is bolstered by infrastructure spending but also the vibrant outlook for data center construction that brings with it tremendous power needs. Over the next five years, U.S. electricity demand is expected to grow by almost 16%, according to Grid Strategies, a consulting firm. That's massive for an industry that saw power consumption increase less than 1% annually over the past 20 years. That demand explains the double-digit strength in orders for the Electrical Americas segment as well as its 29% year-over-year backlog increase.
Eaton management chalks that strength up to $154 billion in construction mega projects announced during Q4 2024. Through the end of 2024, the number of mega projects announced reached 569 with a cumulative value of $1.7 trillion. Backlog levels for those projects stand at $1.9 trillion up 33% year over year. As impressive as those figures are, only 15% of those projects have started and expectations are a record number of starts will occur this year. This keeps us very bullish on Eaton’s shares as well as those for United Rentals URI, Vulcan Materials VMC and Waste Management WM.
Double-clicking on data centers, Eaton shared a few interesting metrics:
U.S. data center construction starts nearly doubled in 2024 and U.S. hyperscaler capex is expected to be around $295 billion in 2025, up 35% year over year. That’s very reaffirming for our positions in Nvidia NVDA and Marvell MRVL.
U.S. data center construction backlog represents about seven years of construction at 2024 build rates. More support for not only ETN but also URI, VMC and WM shares.
But here’s the kicker that adds some nice context for overall non-residential construction activity: In 2024, data centers represented just 17% of mega-project announcements. That means Eaton as well as other Portfolio construction holdings are not overly reliant on data center construction.
As we digest quarterly results next week from Amazon AMZN and Alphabet GOOGL, we’ll revisit our investment rating on ETN shares as warranted.
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At the time of publication, TheStreet Pro Portfolio was long ETN, URI, VMC, WM, NVDA, MRVL, AMZN and GOOGL.
