Tuesday, January 06, 2009
(Cont'd from above)...

Jim (cont'd):   

Eaton was way too cheap to begin with when I recommended it, because it was yielding 4.8%… huge for an industrial company . But after the big move (up), the yield was down… it was down to 3.8%… I am wondering whether we should stick to the strategy we have been using or take a little profits here… Uh, or if it makes sense to hang on. I know I took a little bit off the table… I schnitzeled some for my charitable trust ActionAlertsPlus.com, my charitable trust… I was up too much too quickly. Those were shares I bought when Eaton had a notoriously big… but accidentally juicy yield… And, yes, yes … I will keep up with that little riff… until the accidentally and notoriously high yielding movie of the same name… no doubt stolen from Real Money, the paperback version, comes to a theatre and a bookstore near you. Notorious by the way, opens tomorrow according to Cramer fav Rhea Backer of MTV news.

The bull cases for Eaton… the recession is winding down. We have some good news, yesterday Navistar (NAV), the major truck manufacturer, shot up 23% after the company projected an earlier than expected recovery in American truck sales. That is related to the old Eaton. Plus world wide stimulus is on the way… We are getting some less than horrible signals… Here is the Bear case, the shorts are all hung… they are eating crow. Before we decide what to do with this one… I gotta go to the man… the man who stood on our show right in the teeth of the difficulties… and stood by his company. I want to talk to Sandy Cutler, Eaton’s fabulous CEO, to get a better idea of what is going on.

Mr. Cutler welcome back to Mad Money...

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Interview comments:

Sandy: Thanks Jim, good to be with you this afternoon.

Jim: On December 16th you said auto, truck, and hydraulic operations are to quote “Are seeing a dramatic deceleration in global demand”. Has anything changed?

Sandy: No, really what we were witnessing in December was what we had feared might happen at the end of the year. That as demand had declined thru the fall, you might see many manufacturers virtually shut down their operations for the second half of December. That is what we saw manifesting itself in December. And we think that it is really a clear indication of the fact, that the damage is in the manufacturing economy from the global liquidity crisis. And it is going to take 6 to 9 months for things to get better.

Jim: You also said at the time, that electric and aerospace were just now beginning to get bad. Is that continuing?

Sandy: Yeah, those tend to be later cycle businesses for us. So that, you know, the large commercial aerospace business holding up very well. And the large power oriented side of electrical, holding up well. One of the advantages we now have as a company, is we have about a third of our businesses in early cycle businesses. About a third in mid cycle businesses. And about a third in late cycle businesses. And that is one of the reasons that Eaton is performing so much better through this downturn than previous ones.

Jim: One of the things that I thought was unfair… it’s an old friend of mine Nick Hayman… good anaylst. He said that you were caught off guard this time. You were the one telling us that this was going to happen. What do you think about a charge from an analyst that says that you were caught off guard?

Sandy: I think that our view has been that we have been stating since mid fall, that we felt that conditions were decelerating quickly. Then in early November, at a conference, I stated that I thought the worst thing that we could envision would happen would be if we saw these multiple factory close downs during the second half of December. And that is indeed what did manifest itself. So, it went from what I would call a mid probability case, to all of a sudden a high probability case. But, not to be unexpected when you see this type of liquidity crisis rolling across the world. And it is a global liquidity crisis which is now reflecting itself, several months later, within the manufacturing sector.

Jim: Okay, can you… you went back… I want to touch bases because you know, this is a night time show… it’s a primetime show… don’t have that sophisticated audience. You talked about the notion of
early, mid and late cycle mixture. Can you, for people who aren‘t that familiar with those terms, talk about what the old Eaton looked like. What the new Eaton does? And why… someone might be more interested in the new Eaton given the fact that we may exit a slowdown within 6 to 9 months.

Sandy: There are really 3 important reasons, Jim, that Eaton is performing so differently than it has before. First, about 70% of our sales and profits are now in our electrical, our hydraulics, and our aerospace business. The businesses that many people think of as the newer parts of Eaton.

Second, about 55% of our sales are now driven by economies outside of the U.S. So we are much better balanced on a global basis. And then third, as I mentioned, we‘ve got this really terrific now balance between early, mid and late businesses. That allows us to participate, now, with that chain set of businesses much more equally through the economic cycle. And regardless which economic zone of the world is doing well from a regional point of view. Now, on top of that two years ago we underwent a very large cost reduction effort within the company, closed a large number of factories. And that action, along with the actions that we took place in the 4th quarter, which, unfortunately about 3400 employees. And what we had announced what we planned to do here in the 1st quarter, will benefit us to the tune of about $125 million net of expenses here in 2009. And that is going to be a great help to us at a time when we expect our markets to be considerably weaker than they were even last year.

Jim: When I hear about those cuts… other than, of course, you feel bad for the people who were laid off… I think that that makes me feel that that dividend… which was accidentally high when you were on last… is a pretty safe bet because of the amount of money that you were able to save from just that margin expansion.

Sandy: Well, that plus the fact that anytime that our volumes kind of come over a peak level, we tend to have very strong liquidation from our working capital. So our balance sheet is strong. We did our refinancing both from an equity and debt point of view last spring, at a very proficient point of time. So we feel very well situated in what is going to be still a difficult economy. But Eaton has proofed itself before. We take the actions early, we right size the organization, we believe those are the actions that are underway that will get us through this downturn. And we will come out the other side strongly, because the thing to remember about capital goods is, for every year you do not renew them, they get a year older. So whether they being commercial trucks, general machinery, cars or aircraft, there will become a time when there will be pent up demand. We think, not in 2009, but certainly that begins again in 2010 and 11.

Jim: Okay, just one little quick one. That is consistent with what Navistar said, so you would agree that there could be a turn within the next 18 months in the truck business?

Sandy: Yeah, I think that really broadly a truck is a great indication for kind of industrial goods, and so I would say that you would find it in almost all industrial goods.

Jim: Boy, I gotta tell you, Sandy, you really have reformed the company. You have made it… well, it was always a great company… but you have really made it the ideal company to own I believe at this point in the cycle. Thank you so much Sandy Cutler, from Eaton CEO, just terrific job. I appreciate it.

Sandy: Thanks for having us on Jim.

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Jim's comments AFTER the interview:     Alright guys you see why this stock went up. It is counter intuitive to believe it but if you think that there is going to be a turn…. you see what he has been able to accomplish. It is why I own the stock for my trust. I like the early cycle. I feel like no more selling for Eaton Corp. (ETN*)… and if it comes back to that accidentally high yielding situation…. well, let’s just say buy, buy, buy!…

[verbatim recap]

Read Jim's next Segment here