Industrial stock tied to the AI boom reports strong quarter. We like it, for now

Eaton , a maker of power management solutions for AI data centers and other commercial markets, delivered a solid quarter on Friday that raised more questions for us than it answered. Earnings per share for the first quarter ended in March rose more than 33% from the year-ago period to $2.72, beating the LSEG compiled analyst consensus estimate by a penny. Revenue rose 7.3% to $6.38 billion, beating the LSEG compiled analyst consensus estimate of $6.26 billion. Organic sales grew 9%, far exceeding the Bloomberg estimate for a 6.8% increase. 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 : April 3, 2025 Initiated : Nov. 15, 2023 Bottom line Has Eaton’s stock peaked? During our Morning Meeting, Jim Cramer said he’s concerned about it. In afternoon trading, shares of Eaton turned positive in a strong overall market. However, the stock has been struggling to get back to its 2025 closing high of $371 on Jan. 22, which was just days before the Chinese startup DeepSeek’s more efficient artificial intelligence model slammed the AI trade. Jim said he’s not ready to give up on Eaton, because it’s “doing quite well,” referring to the company’s largely positive first-quarter results and guidance. Indeed, the company reported accelerating organic sales growth with record first-quarter margins. However, he did say he needs to rethink the position, given the Club’s positions in DuPont and Dover also have ties to the AI trade. He also has his eye on GE Vernova in the Bullpen to fill out the electrification/power generation theme. ETN YTD mountain Eaton YTD In addition to Eaton’s revenue and EPS beats, sales at three of the company’s five segments — Electrical Americas, Electrical Global, and Aerospace were better than expected, with solid growth. The other two segments, Vehicle and eMobility missed, with the former sinking nearly 15% year over year and the latter up just 2.5%. Orders for the Electrical Americas segment, which accounts for nearly half of total company revenue, fell 4% organically on a 12-month rolling average. Excluding one large multi-year data center order in the first quarter of 2024, orders rose 4%. Jeff Marks, director of portfolio analysis for the Club, said Friday the market seemed to be aware of the order slowdown as Eaton and all multinational companies try to figure out President Donald Trump ‘s tariff endgame. Slowing order growth has been a multi-quarter trend due to tough comps going back to 2023. “Book-to-bill remained above one, with 6% growth in our large $10.1 billion backlog, providing strong visibility for our organic growth in 2025 and beyond,” CFO Olivier Leonetti said on the company’s post-earnings call. The data center end-market makes up 17% of Eaton’s total revenue, according to the company’s 2025 growth assumptions. On the call, incoming CEO Paulo Ruiz referred to the tech companies that reported earnings this week, which included Club names Amazon , Meta Platforms , and Microsoft , saying, “all the calls we have had this week, all the hyperscalers have confirmed the level of capex. So, we believe that this 15% CAGR for data centers is still intact.” Capex stands for capital expenditures, and CAGR stands for compound annual growth rate. Ruiz will become CEO following the May 31 retirement of Craig Arnold, who has been at the helm since 2016. Management also talked about the data center designs of the future that require Eaton to work with not only the hyperscaler clients, the big tech companies that run the facilities, but also with chipmakers. “Therefore, you need to have open discussions with the likes of … Nvidia and so on. Not many companies, especially foreign companies, can have a dialogue with them. So again, this is another entry barrier that creates” opportunity for Eaton in this development area of the end market, Ruiz said on the call. Eaton, which aims to manage through the tariffs, plans to adjust its costs, supply chains, and prices as needed. Ruiz said, “We will see how the tariff evolves. We expect over time to recover from a margin standpoint, but not this year.” The company expects to fully offset the impact of tariffs through USMCA, the 2020 United States-Mexico-Canada Agreement, compliance, supply chain optimization, disciplined cost containment, and commercial actions. Eaton believes its region-for-region strategy provides a competitive advantage. Guidance Eaton raised its full-year organic sales growth guidance range to 7.5% to 9.5% from 7% to 9%, but slightly lowered its segment margins outlook as a result of tariff cost pass-through. The company reaffirmed its full-year EPS guidance. The company’s second quarter adjusted EPS guidance of $2.85 to $2.95 was short of estimates. Perhaps, management was being a little conservative here. The outlook for Q2 organic sales growth and segment margins was fine. Management said on the call that these forecasts reflect the “net impact of the announced tariffs and assumes the current 90-day pause on reciprocal tariffs will persist to the end of the year.” (Jim Cramer’s Charitable Trust is long ETN, DD, DOV, AMZN, META, MSFT, NVDA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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