Can Eaton Outrun the Recession?

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"No Place to Hide"

Eaton is not alone. The recessionary fog has manufacturers like Honeywell, Illinois Tool Works (ITW), and United Technologies (UTX) bracing for big declines in sales and profits this year as their customers sharply reduce orders. Even stalwarts like GE and 3M (MMM) have struggled. Meanwhile, the Federal Deposit Insurance Corp. on Dec. 14 backed $2 billion in debt issued by Deere (DE) to help farmers purchase its tractors and other equipment.

As the recession spreads, overseas demand is drying up for U.S. goods that had sustained manufacturing growth. American exports have declined for three straight months, and in China imports dropped an alarming 17.9% in November from a year earlier. "Business is falling off faster than anybody anticipated," says Tom Runiewicz, an economist at IHS Global Insight. "It's a global manufacturing recession, and there's no place to hide."

Despite Eaton's current struggles, Cutler, a sprinter on the track team during his Yale days, believes the company is in good shape for the long run. Its debt levels are reasonable, and some sectors, like utility and medical center construction, have remained "surprisingly strong," he says. "When companies delay purchases, that brings an up-cycle. We don't think that up-cycle will be in 2009. We are in the belly of the beast right now. But we will start back up, and our array of businesses has us well situated."

Counting on a Rebound

One recent bright spot for the company is its work with shipping giant UPS (UPS) on more fuel-efficient hydraulic hybrid delivery trucks, powered by pressurized fluid, not electricity. UPS trucks using Eaton's new hydraulic power system, which achieved up to a 50% improvement in fuel economy during testing, will roll out in Minneapolis early this year.

Because of such advancements, manufacturing experts remain largely sanguine about Eaton. Analyst Eli Lustgarten of Longbow Securities, for one, has kept his "buy" rating on the stock. "I think they will not only survive but will be in a good position to thrive once the global recession is over," says University of Michigan manufacturing professor Wally Hopp.

Buffett presumably is one of those investors who is counting on it: He bought his shares at an average price of $71, and Eaton closed at 51.92 on Jan. 5.

Boyle is deputy Corporations editor for BusinessWeek.