Eaton Corp. Deep Dive (NYSE: ETN)
Preamble: IES Holdings (NASDAQ: IECS) UPDATE
Last week, I covered IES Holdings (IESC), which performed exceptionally well since reporting Friday, May 3, 2024. I significantly underestimated growth by about 8% at the topline with exceptionally strong margin expansion that I did not anticipate until later in the fiscal year. I had anticipated modest topline growth with 10.25% aEBITDA margin. The reported revenue growth came in at +24% y/y with 12% aEBITDA margin. Though I’d call this a major win for the firm and shareholders, I do want to direct readers to the slightly down backlog for the period.
Though this may not be a significant move, it may suggest a slight slowdown in future business. I will reference my report from Tuesday, May 7, 2024 as it pertains to GDP and the PMI readings. Despite the forward outlook as it relates to backlog, the firm performed exceptionally well across their verticals, with Infrastructure Solutions growing 44%, Commercial & Industrial up 41%, and Communications up 37%. Residential performed significantly better than I had anticipated; rather than being flat, the firm squeaked out +11% growth at the topline paired with segment operating margin improvement to 10%.
I’m raising my guidance for the duration of eFY24 and for eFY25 as the firm experienced exceptionally strong growth across their segments that cater to data center power and network infrastructure.
Overall, I’m increasing my price target to $322.50/share, representing 12.28x eFY25 aEBITDA. This compares to my previous price target of $228/share. Yes, this is a huge difference in values; however, IESC has a huge opportunity ahead as business in the data center space sees no hints of slowing down, primarily at the hyperscaler level.
Be sure to catch up on my initial investment thesis covering IES Holding:
Be sure to review my updated guidance on Super Micro Computer (SMCI) as I discuss the macroeconomic backdrop behind my data center thesis.
Super Micro Computer: Growth May Slow In 2025
Eaton Corp (NYSE: ETN)
Interestingly enough, this week’s single-name stock idea comes from a similar backdrop. This week I will cover Eaton Corp. (NYSE: ETN).
Eaton is an Ireland-based power management company with global operations with a primary focus in US-based power systems. The firm reports under 5 segments:
- Electrical Americas
- Electrical Global
- Aerospace
- Vehicle
- eMobility
Eaton Corp. (NYSE: ETN) Investment Thesis
Eaton Corp.’s primary operations focus in power transmission across multiple segments and will realize strong tailwinds across its data center components, power transmission, and battery backup and generation segment. The data center space continues to grow at a 10.9% CAGR through 2030 as hyperscalers, such as Amazon AWS, Microsoft Azure, and Oracle OSI build out regional data centers to cater to enterprise and sovereign needs. This level of growth will bring significant demand for server racks, cooling infrastructure, and electrical-related infrastructure as it pertains to Eaton’s operations. Though I anticipate a modestly flat market across the automotive and aerospace industries, I do believe that the level of growth in data center will offset any headwinds the firm may face in the coming years. My expectation is that automotive and aerospace will experience flat sales in the coming years before accelerating in eFY26/27 as OEMs ramp up production of vehicles and as commercial and military planes are brought up in production. Eaton commands a firm value of $139b, making it one of the heavy hitters in the industry.
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