Eaton reports mixed results but makes clear its AI data center business is still full steam ahead

Eaton on Friday delivered mixed fourth-quarter results Friday, but the electrical components and power systems company made clear that its fast-growing data center business isn’t slowing down despite the emergence of Chinese startup DeepSeek and its more efficient AI models. Revenue in the three months ended Dec. 31 increased 4.6% year over year, to $6.24 billion, missing the $6.33 billion consensus, according to estimates compiled by LSEG. Sales rose 6% on an organic basis, which strips out the impact of currency fluctuations and acquisitions and divestitures. Eaton also said its topline experienced a roughly $80 million headwind tied to Hurricane Helene and aerospace labor strikes. Adjusted earnings per share (EPS) advanced 11% year over year, to $2.83, better than the $2.81 consensus, LSEG data showed. Segment margin , similar to an adjusted operating income margin, expanded 192 basis points, to a quarterly record of 24.7%, ahead of the 24.1% estimate, according to FactSet. Shares were higher by roughly 0.75% in afternoon trading, shaking off earlier losses in the session. Eaton Why we own it: Eaton has exposure to several important megatrends like electrification, energy transition, and infrastructure spending. It is also a player in generative AI, where data centers use its power management solutions and electrical equipment to keep up with the heightened demand for more computing power. We see a long runway for growth. Competitors : Parker-Hannifin , DuPont and Honeywell Most recent buy : Jan. 28, 2025 Initiated : Nov. 15, 2023 Bottom line Eaton’s numbers were not perfect, but the company did enough to validate our decision Tuesday to step into the DeepSeek-driven sell-off and add to our position . With its results in hand, we’re reiterating our buy-equivalent 1 rating and price target of $375 a share. While shares had found their footing recent days , Eaton investors still really only had one topic on their minds coming into Friday’s print: What does the release of DeepSeek’s lower-cost, power-efficient AI model mean for data center infrastructure demand? Sure, DeepSeek may eventually accelerate AI adoption because AI is now cheaper to run. But would DeepSeek’s efficiency innovations cause Eaton’s customers put off orders in the short run, waiting until AI demand increases to absorb the now-excess compute capacity that exists? The answer is that this doesn’t appear to be a cause for concern at Eaton. The lead time for the company’s orders means that they can’t stop working even for a second if they’re going to fulfill those orders and get through the massive backlog at some point this decade. CEO Craig Arnold addressed this head-on during on the call, and it’s worth including his remarks at length: “Given the heightened discussions on data centers this week, I wanted to take a moment to highlight our data center business and why we have so much confidence in our outlook for continued growth. … As you can see from the data, the rate of growth is continuing to accelerate with negotiations and orders well ahead of sales. … Our backlog is rapidly increasing, up 50% over prior year, which was up 70% over 2022. And as you’ve all seen, customers continue to increase their forecast for capital investments. Hyperscale customers alone expect to spend almost $300 billion in [capital expenditures] in 2025, up 30% from 2024. … At 2024 build rates, it would take seven years to consume the current backlog, and the data center construction build rate doubled between 2023 and 2024. So any notion that this market will slow down is simply not consistent with any of the data that we’re seeing. The industry will no doubt continue to see innovation and technology developments that reduce costs. And if judged by history, this will be good for the industry and an accelerator of growth for 2025 and for years to come. We expect data centers to be our strongest market and stand by our previous forecast, which assumed strong double-digit growth.” Arnold, who is set to retire June 1 after hitting Eaton’s mandatory retirement age of 65, offered more insights during the question-and-answer session with analysts. “So most of the discussions we have, including after the news this week, is about continuing to invest,” he said. “No distraction on the news this week and continue to build. And you see how our negotiation pipeline development is developing in our backlog as well. So I think the way forward continues to be to accelerate the buildouts.” As AI adoption grows, the kinds of data centers being built may shift from sprawling facilities geared toward training AI models on massive amounts of data — a very compute-intensive process — toward those better suited for running models on a day-to-day basis, in a process known as inference. Data centers built for inference use consume less energy, Eaton executives noted, which could speed up the construction. “That could be a very good thing for us,” Allen said. Put it all together, and we have a positive view of Eaton’s 2025 and more distant future, despite the fact the fourth-quarter results were mixed. Quarterly commentary Eaton provided an update on North American megaprojects, which management defines as those projects with a value of $1 billion or more. Here’s what Arnold had to say on the call: “Each quarter, we’re seeing an increasing number of projects, higher dollar values, and a growing backlog. Q4 was another record with 65 projects announced at a value of more than $150 billion through Q4. We’re now at 569 projects with a cumulative value of $1.7 trillion, and the backlog now stands at $1.9 trillion, up 33% from last year. Through Q4, approximately 15% of these projects have started, and we expect a record number of starts in 2025.” The company’s contract win rate remains at nearly 40% and Eaton is in active negotiations on another $3.1 billion worth of electrical content orders. Moreover, Eaton is running leaner than expected, with management realizing over 190 basis points of segment profit margin expansion, resulting in a record high segment margin of 24.7%, as seen in the chart below. A basis point is equal to 0.01%. Cash flow was another bright spot, with both operating cash flow and free cash flow performance hitting quarterly records for the company. Eaton’s Electrical Americas segment — covering electrical and industrial components, as well as various power products — missed revenue expectations, though $2.9 billion is still a fourth-quarter record. The segment’s operating profit and operating margin also both hit record levels for the company. Eaton’s “Electrical Americas” backlog grew 29% organically versus the year-ago period. At Electrical Global, sales of $1.57 billion also reached a fourth-quarter record, with the backlog growing 16% organically year over year. Aerospace sales were a record, with operating profits setting a fourth-quarter record. The segment’s backlog also increased 16% organically versus the year-ago period. Vehicle sales were down year over year, as were profits. However, the profit margin result does represent a fourth-quarter record. Guidance Looking ahead, management provided guidance for the current quarter and full year 2025. For the current quarter: Organic sales growth between 5.5% and 7.5%, which comes up short versus the 7.6% the Street was looking for, according to FactSet. Segment operating margins are expected to land in a range of 23.7% to 24.1%, better than the FactSet consensus of 22.8%. Adjusted earnings are expected to be between $2.65 and $2.75 per share, which at the midpoint is in line with expectations of $2.70 per share, LSEG data showed. For the full year 2025, Eaton is forecasting: Organic sales growth between 7% and 9%, matching the 8% consensus estimate at the midpoint, per FactSet. Segment operating margins are expected to land in a range of 24.4% to 24.8%, which at the midpoint is slightly ahead of the 24.5% consensus, according to FactSet. Adjusted earnings are expected to be between $11.80 and $12.20 per share. At the midpoint, that’s ahead the EPS consensus of $11.95, according to LSEG. (Jim Cramer’s Charitable Trust is long ETN. See here for a full list of the stocks.) 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