Eaton Corporation plc : Bet on the energy transition

Published: 2025-06-16 09:56:24 ET ETN

Published on 06/16/2025 at 09:56

By Grégoire Legrand

Founded in 1911, Eaton has grown from a truck axle manufacturer into a diversified global power management company serving customers in over 170 countries with 92K+ employees. Over the decades, the company has strategically transformed its portfolio— today expanding into high-margin electrical and aerospace systems that support critical infrastructure across commercial, industrial, and defense markets. Let’s take a closer look.

The power management industry is fueled by strong trends including electrification, data center expansion, infrastructure upgrades, and tightening energy efficiency regulations. The share of electricity in final energy consumption is projected to rise from about 20 % today to over 50 % by 2050, according to the IEA's Electricity 2024 report. The global data center services market is forecast to grow at a CAGR of ~10 % from 2025 to 2030, rising from approximately $62 billion in 2024 to about $110 billion by 203.

Change in electricity demand by region, 2021-2027

Eaton operates through five distinct business segments:

Between 2015 and 2024, the company shifted its strategy to focus more heavily on the Electrical and Aerospace segments, which accounted for around 70% of profits at the time, compared to over 90% today. This shift has helped improve margins from 16% to 24%, with less volatility and stronger growth—averaging 11% annually since 2020.

Eaton’s electrical business is the group’s largest segment and is divided into several key divisions:

The U.S.-based group is expanding notably in the data center and commercial & industrial (C&I) sectors, which it views as key future growth drivers, backed by strong innovation and emerging opportunities, and benefits from strategic global locations that position it well to capture the momentum in these markets. For instance, two of its products - VFI transformer and 9395XR UPS are projected to grow annually by 17% and 50%, respectively, through 2030, supporting continued expansion.

Eaton’s Electrical Sector has expanded through targeted acquisitions, particularly in China and Europe. Recent moves include a 50% stake in Jiangsu Huineng (July 2022) and 49% in Jiangsu Ryan (April 2023), strengthening Eaton’s position in China’s electrical infrastructure. In 2024, Eaton acquired Exertherm in the UK to boost smart thermal monitoring, and took a 49% stake in NordicEPOD, enhancing its reach in the growing Nordic data center market.

Eaton’s Aerospace is its second biggest one and provides advanced systems in Fuel and Air Systems, Hydraulics and Motion Control, and Electrical Subsystems. It offers leading fuel and oxygen solutions, a strong fluid and air conveyance portfolio, and interconnects built for harsh environments. Eaton also holds the world’s largest hydraulic systems portfolio, with next-gen distributed technologies and innovative motion control. Its thermal management systems and integration of broader electrical capabilities enhance performance in a highly technical and demanding sector.

The group continues to rely on targeted acquisitions and innovation as key growth drivers, while benefiting from strong demand in both military and commercial markets.

On the commercial side, aircraft production is set to rise sharply through 2030, driven by the ongoing ramp-up of the Airbus A320NEO and Boeing 737MAX programs, as well as the expected entry into service of the Boeing 777X. This supports mid- to high-single-digit (MSD to HSD) growth, further reinforced by strong aftermarket demand which remains robust, with order backlogs exceeding 13 years at 2024 delivery rates.

In defense, production is also on the rise, with a 6% CAGR forecast through 2030 where Aging global military fleets are accelerating the need for retrofits, upgrades, maintenance, and new defense platforms. Growth is supported by new platforms like the Bell FLRAA and Boeing Saab T-7A entering production, alongside increased output of the Sikorsky CH-53K and stable volumes for mature platforms such as the Boeing KC-46A and Lockheed Martin F-35.

Eaton delivered strong Q1 2025 results and completed acquisition of Fibrebond, enhancing its ability to serve data center, industrial, utility and communications customers. EPS rose 20% YoY to $2.45, while adjusted EPS reached a record $2.72, up 13%. Revenue grew 7% to $6.4 billion - driven by 9% organic growth - and segment margins expanded to a first-quarter high of 23.9% and operating cash flow was $238 million, with $91 million in free cash flow. Electrical Americas led performance with $3.0 billion in sales (up 12%) and record margins of 30.0%. Backlog grew 6% YoY, despite a decline in rolling orders due to a large prior-year data center win. Electrical Global posted $1.6 billion in sales (up 7%) with 18.6% margins, and a 5% backlog increase. Aerospace saw sales of $979 million (up 12%), margins of 23.1%, and a 16% increase in backlog - supported by a book-to-bill ratio of 1.1. The Vehicle segment declined 15%, while eMobility grew modestly to $162 million.

Between 2016 and 2024, Eaton’s revenue grew from $19.8 billion to $24.9 billion, with EBITDA reaching $5.8 billion (a margin of 23.28%) and net income doubling from $1.9 billion to $3.8 billion. In 2024, the company posted a net margin of 15.25% and an operating margin of 19.58%, with analysts projecting these to reach 16.95% and 21.62%, respectively, by 2027.

Debt levels have remained relatively stable, at $7 billion in 2024 versus $7.5 billion in 2016, while free cash flow is expected to grow from $3.5 billion in 2024 to $4.9 billion by 2027. Profitability is also improving, with return on assets at 9.88% in 2024 and projected to reach 11.19% in 2025, and return on equity rising from 20.22% to an expected 24% over the same period.

This solid financial performance is reflected in Eaton’s current valuation, with a P/E ratio of 34.9x—well above its 10-year average of 22.9x, though expected to normalize to 29.7x in 2025. Eaton competes with both global industrial giants and specialized players. Key competitors include Schneider Electric (32x), Siemens (17.5x), ABB (25.4x), GE Aerospace (27.8x), and Rockwell Automation (32.4x), many of which also trade at elevated valuations.

Eaton has also focused heavily on capital allocation, investing $12 billion in capital expenditures and R&D, over $7 billion in acquisitions, and returning more than $9 billion to shareholders through share repurchases.

Eaton faces some clear challenges, including exposure to cyclical markets, the complexity of integrating acquisitions, and limited differentiation in certain mature product lines. Its large size can also make it slower to adapt in fast-moving segments, but the group is well-placed to benefit from powerful trends like electrification, rising data center demand, and global investment in grid upgrades and renewable energy.

Grégoire Legrand