Data Center Expansion Continues Unabated, According to Eaton
Eaton (NYSE: ETN), the power management company, has reported record second quarter 2025 results, marking a significant growth in earnings and sales. The company's earnings per share (EPS) stood at $2.95 (adjusted), up 8% year-over-year, and quarterly sales reached $7.0 billion, a 11% increase from Q2 2024, driven by 8% organic growth.
In a statement, Eaton's CEO Paulo Ruiz expressed confidence in the company's strategy and anticipated continued momentum, fueled by megatrends such as digitalization and electrification. These trends align well with the AI-driven expansion in data centers and related infrastructure investments.
The Aerospace segment, a key contributor to Eaton's growth, saw its operating margins rise to 22.2% in the recent period. The segment's revenue was $1.1 billion, a 11% increase, and data center orders for Eaton were up over 50% from last year. With a book-to-bill of 1.1x, the Aerospace segment's backlog is expected to grow further.
Eaton's robust Return on Equity (ROE) stands at 21%, reflecting highly effective capital utilization, a factor that attracts investors in the industrial and technology sectors. The stock has gained about 29% over the past three months, with an average 12-month price target around $379, suggesting an approximate 9% upside. Most Wall Street analysts rate Eaton as a "moderate buy."
Looking ahead, Eaton expects to do at least $2 billion of share repurchases, and the company's share count is down about 2.3% from last year due to buybacks. Eaton's new outlook has EPS growing by 11-12% from last year. However, ongoing softness in vehicles and residential activity will be a headwind, given the magnitude of the AI boom.
Despite the rally, shares are pricing in a fairly perfect outcome, and if the industrial economy slows further, that will offset some of these benefits. The pullback from recent highs indicates that valuation is getting stretched, and ETN is increasingly in need of "beats and raises" to validate its share price. On a pullback towards $325, it would be considered a good time to buy ETN.
In the vehicle unit, sales decreased by 8% to $663 million in the recent period, due to factors such as elevated interest rates, weak consumer sentiment, and tariff costs. The vehicle unit's margins compressed by 100bps to 17% in the same period.
Despite these challenges, Eaton's margins expanded 110bps to 20.1% in the Electric Global segment, and the segment's revenue grew by 9% to $1.8 billion. The Electrical Americas segment saw organic growth of 12% to $3.4 billion in revenue. Eaton's operating margins expanded by 20bps in Q2 to 23.9%.
Eaton's free cash flow outlook remains strong, with expectations of $3.8-$4 billion this year, and about 5-6% growth over the next three years. The exact ending spot of free cash within this range will depend on working capital timing.
In conclusion, Eaton's solid financial health, strong growth in orders and backlog, and leadership in power management technologies support an optimistic outlook amid increased AI-fueled spending and expansion of data centers. Eaton's dividend yield is 1.1%, and the company has $11 billion in debt, providing room for tuck-in M&A and returning all free cash flow to investors.
[1] Eaton Q2 2025 Earnings Release [2] Eaton Q2 2025 Earnings Call Transcript [3] Yahoo Finance: Eaton Corporation (ETN) [4] MarketWatch: Eaton Corporation (ETN) [5] Seeking Alpha: Eaton Corporation (ETN)
- The growth in Eaton's earnings and sales in Q2 2025, driven by trends such as digitalization and electrification, indicates a strong alignment with the AI-driven expansion in data centers, making it an attractive investment option within the technology industry.
- Eaton's robust financial health, reflected in its 21% Return on Equity (ROE), attracts investors in the industrial and technology sectors, while its strong growth in orders and backlog supports an optimistic outlook amid increased AI-fueled spending and expansion of data centers.
- The Aerospace segment's revenue growth, driven by a 50% increase in data center orders, and the Electric Global segment's 9% revenue growth align with the trend of digitalization, highlighting Eaton's strategic position in the technology and data-and-cloud-computing sectors.
