After reading through the latest 10-Q, I think I have a little better feel for why the stock is where it is. I think the market is overestimating the negatives and overly discounting the positives, but at least I have a better feel for what some of the negatives are.
I think the market is concerned because the top line shrank because of divestitures and the bottom line shrank because of the semiconductor equipment slump. That combination isn't encouraging, but I think it's pretty clear both are fairly short-term effects.
Some excerpts:
The Semiconductor Equipment Business segment experienced a decline in sales while all other business segments experienced sales growth in the second quarter of 1998. The Company's 1997 strategic repositioning program of major divestitures and important acquisitions further resulted in reduced second quarter 1998 sales of $300 million and first half 1998 sales of about $500 million on a net basis when compared to one year ago.
It is good to see that even though semi equips are going through a hard time, the other segments are still doing well.
Despite the difficult conditions the Company is experiencing in the semiconductor equipment business, the Company's consolidated second quarter earnings per share came within four cents of last year's record performance. The Company would have reported record earnings per share had the Company not also been affected by the PACCAR and General Motors strikes, which together reduced earnings per share by about six cents per share. The Company remains focused on building an enterprise that demonstrates both superior operating performance and higher sustainable growth. However, because of the severe and prolonged downturn in the semiconductor capital equipment business, the Company is no longer confident that its 1998 earnings will exceed 1997's record results.
The GM strike should not be a recurring event, and that company's growth strategy seems to be staying on track. However, the fact that this year's projections have been reduced has surely had a big effect on the short term stock price.
Also, the Company is struggling a bit because of continued penetration gains and stronger than expected European volumes. As a result, margins are being affected as production is adjusted around the world to satisfy varying levels of global demand.
It could be worse than that. <g> They're having trouble adjusting to stronger demand than expected in different regions, but that's much better news than adjusting to weakening demand.
Semiconductor Equipment . . . Industry orders are one third lower than six months ago with no sign of an imminent upturn in sight.
No imminent upturn in sight. This also is a major short-term concern for the earnings. And the fact that an upturn is not in sight probably concerns some more than it should. I feel pretty good about Eaton's position once things eventually do turn around, which they will in good time.
All things considered, I am a buy at this price.
G.P. |
