Diversified industrial manufacturer Eaton Corporation (NYSE: ETN) recently announced increases to both 2Q and FY 2007 guidance based on increases in sales growth. But these sales numbers bear investigating. According to 2Q 2007 earnings, sales increased 4% to $3.25 billion. But 3% of that growth was due to acquisitions, 2% was due to favorable exchange rates, and organic growth accounted for NEGATIVE 1%. Likewise, the EPS numbers bear scrutiny. 2Q EPS was $1.64, well ahead of the forecast $1.35-$1.45, but $0.17 of that differential was due to a tax adjustment, not to increased profitability. Nonetheless, Eaton has raised FY guidance by $0.30 to reflect FY EPS in the $6.75-$6.95 range.

Eaton CEO Alexander Cutler credits Eaton's diversification strategy and implementation of a program entitled Excel 07 for the company's positive performance. Upon closer investigation, these two programs resulted in an operating margin of 12.9%, exactly the same operating margin the company posted in 2Q 2006 without the benefit of these two initiatives. Some sectors of the company are posting good numbers. The electrical power sector posted a sales increase of 11%, and this was before the introduction of Eaton's hybrid truck power system went into production. Eaton electrical power quality deals primarily with non-residential customers, so it remains unaffected by the ongoing carnage in the US residential housing market. The fluid power sector, primarily hydraulics, is poised to post great numbers. Eaton just won two large military helicopter contracts totaling more than $220 million. The aerospace industry, both in the US and Europe, remains a lucrative customers for Eaton.

Eaton's stock has taken several hits recently, closing on 16 August at $85.12, down $2.63. Much of this loss can be traced back to negative publicity about continuing declines in Eaton's heavy-duty truck sector due to implementation of NAFTA regulations. But Eaton knew about these regulations well ahead of time and has been making strategic acquisitions in its other sectors to offset anticipated losses in the truck sector.