Electrical components and power systems company Eaton delivered mixed third-quarter results Thursday morning, and its stock paid the price. Revenue increased over 8% year over year (both organic and on a reported basis) to $6.35 billion, slightly below the $6.37 billion the Street was looking for, according to analyst estimates compiled by LSEG. It should be noted, however, that in management’s estimation, Hurricane Helene in Florida and the ongoing labor Boeing strike, both temporary issues, were together a roughly $50 million revenue headwind. Adjusted earnings per share jumped 15% to a record $2.84, better than LSEG’s $2.80 consensus. Segment margin , similar to an adjusted operating income margin, expanded 76 basis points, to a quarterly record of 24.3%, ahead of the 23.9% estimate. Eaton management raised its full-year guidance for both operating margin and earnings per share (EPS). The company’s outlook for the current (fourth) quarter was mixed. ETN YTD mountain Eaton YTD We didn’t see anything in Eaton’s report or management’s outlook for the remainder of the year and into 2025 that causes us to rethink our investment. Given the stock’s 34% gain year to date, which has outpaced the S & P 500 ‘s advance, it’s not too surprising to see some profit taking on the mixed print. We’re keeping our wait-for-a-pullback 2 rating . However, we’re increasing our price target to $375 per share from $350, implying over 9% upside from Wednesday’s close. Bottom line A major driver for Eaton, central to our investment thesis, is selling products needed to power the build-out of data centers to handle artificial intelligence workloads. If we’ve learned anything from the megacap cloud providers that have already reported earnings, this demand will continue well into 2025 and should play right into Eaton’s hands. Indeed, CFO Oliveri Leonetti said on the post-earnings conference call, “Electrical backlog benefited from acceleration in order intake from tailwinds of the secular trends, including hyperscale orders within the data center end market.” Overall profitability was better than expected and top-line momentum continued in the two most consequential segments – Electrical Americas and Electrical Global. Indicative of continued momentum in Electrical Americas, the segment’s backlog increased 26% year-over-year, closing out the quarter with a 1.2x book-to-bill ratio. As for the Aerospace segment — despite the sales miss, again largely attributable to the strike – the backlog increased 14% and realizing a 1.1x book-to-bill in the quarter. Operating and free cash flow results were a bit short versus expectations but do represent quarterly records for the company. Eaton Why we own it: Eaton has exposure to several important mega-trends like electrification, energy transition, and infrastructure spending. It is also a player in generative AI, where data centers use its power management solutions to keep up with the heightened demand for more computing power. In North America alone, the company has picked up more than 415 projects valued at more than $1 billion each, $1.2 trillion in total, since January 2021. We see a long runway for growth. Competitors : Parker-Hannifin , DuPont and Honeywell Most recent buy : Aug. 6, 2024 Initiated : Nov. 15, 2023 The effects of the hurricane and the Boeing strike factored into management’s fourth-quarter guidance, which came up a tad short in terms of organic sales growth. That said, management was quick to note that these issues are transient and a matter of timing, not demand. In other words, revenue will be pushed out to 2025, not lost, which is why investors will be rewarded for sticking with the stock. We did book some profits in Eaton earlier this week , noting the bar was high going into Thursday’s print. Thanks to our sale, we’re in a position to view any further pullbacks as possible buying opportunities. We wouldn’t be surprised to learn Eaton, in typical fashion, is keeping its outlook conservative — under-promising now so that they can overdeliver and guide higher in the quarters to come. Commentary Looking ahead to next year, data centers should continue to have relentless demand for more power, Aerospace will bounce back once the Boeing strike ends, and everything from commercial buildings to residential homes and vehicles is becoming more electrified. These secular trends are not going away anytime soon. Eaton provided details on North American megaprojects, which management defines as those projects with a value of $1 billion or more. “Megaproject announcements have accelerated in the past six months with project cancellation rates around 10%, well below historical levels,” the company said in its earnings press release. In the third quarter, 49 projects were announced, worth over $175 billion, driving further growth in the backlog of planned projects, which now stands at about $1.8 trillion. In total, there are plans for 504 projects on the books. Only 16% of them have started, representing more than $1.7 billion in orders. The company says its contract win rate is nearly 40%. The team is in active negotiations for another $3 billion worth of orders. On the call, CEO Craig Arnold said, “Taken together, we think they provide a strong validation of the megatrends and support our view on the long-term outlook of our end markets. As we prepare for the growth ahead, we’re making investments in our manufacturing capacity naturally.” Guidance Eaton expects segment operating margins for the full year to land in a range of 23.5% to 23.9%, up from the prior range of 23.3% to 23.7%, and better than the 23.6% consensus, at the midpoint. Adjusted full-year EPS guidance was raised to a range of $10.75 to $10.81, an increase from the prior range of $10.65 and $10.75, and well ahead of the $10.67 estimate at the midpoint. Full-year organic sales growth guidance of 8% to 9% was left unchanged, slightly short of the 8.7% estimate, at the midpoint, as management increased its outlook for Electrical Americas while taking down Aerospace (ongoing strike), Vehicle and eMobility segments. Organic revenue in Q4 is expected to grow 6% to 7%, a miss versus the 8.3% the Street was looking for. Fourth-quarter Segment margin guidance of 23.6% to 24% is ahead of expectations for 23.6%, at the midpoint. Adjusted EPS in the fourth quarter of $2.78 to $2.84 is expected, matching the $2.81 estimate, at the midpoint. 2025 outlook Looking to next year, management didn’t provide formal sales or earnings guidance, but they did provide growth assumptions for the company’s key end markets. Data centers and distributed IT (17% of total sales), commercial aerospace (9% of sales), and electric vehicle (3% of sales) are expected to see “strong/double-digit growth” on a percentage basis. The Utility end market (11% of total sales) is expected to see “solid growth.” Industrial facilities (12% of sales), defense aerospace (6% of sales), and commercial and institutional (20% of sales) are expected to realize “modest growth.” Residential (6% of sales), machinery (05% of sales), and internal combustion engine light vehicles (4% of sales) are expected to see “slight growth.” Commercial vehicles (7% of sales) are expected to “decline” in 2025. Put it all together, and the team sees overall 2025 market share growth of roughly 6% to 8%, with an incremental margin contribution of about 30% to 35% thanks to organic growth. Capital spending is expected to be between $900 million and $1 billion. Additionally, the company said that interest, pension, and other corporate expenses are expected to be a 20-cent per-share headwind to earnings. According to a note from Jefferies, the implied EPS guidance range is $11.50 to $12.50 next year, right about in line with expectations. (Jim Cramer’s Charitable Trust is long EPS. 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. 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Electrical components and power systems company Eaton delivered mixed third-quarter results Thursday morning, and its stock paid the price.