Diversified manufacturer Eaton Corp is seeing an improved deal environment and is more willing to deploy cash toward mergers and acquisitions than toward a stock buyback, its chief executive said.

The company, which reported stronger-than-expected earnings and raised its dividend for the first time since 2008, was responding to better U.S. and world economies, CEO Sandy Cutler told Reuters.

"We are now seeing more attractive opportunities," Cutler said in an interview. "Our hope is to deploy the capital at advantageous rates that makes it better than a buyback to our shareholders, but it remains to be seen whether we get the deals done."

He said acquisitions were more likely to be used to grow Eaton's electrical, hydraulic and aerospace businesses. He did not mention the company's truck and automotive divisions.

"We're willing to enter again," Cutler said. "A year ago we weren't, because we were worried about the economy."

Most of Eaton's earnings beat came from much stronger than predicted markets. The company now forecasts its end-markets will grow 8 percent this year, up from its 6 percent growth forecast three months ago.

Orders Evidence of Recovery
Cutler cited a 27-percent jump in bookings in Eaton's electrical Americas segment, and said orders were also up in hydraulics and aerospace.

"Some of our late-cycle businesses are clearly bottoming at this point," Cutler said.

"We think that means good things for 2011. it builds more conviction (that) we're seeing a muted recovery that's working through into the mid-cycle. 2011 is going to be stronger than '10."

Early-cycle markets, like trucking, have already rebounded, as truck production jumps in anticipation of higher freight shipments. For Eaton, mid-cycle markets include industrial hydraulics, and power quality markets like data centers. These are "getting quite busy," Cutler said.

The orders trends suggest that another key Eaton market, non-residential construction, could end its protracted slump early next year. That market, hurt by lower property values and constrained credit, is forecast to shrink by 20 percent this year, according to an influential architects' group.

Meanwhile, Cutler said he thought sovereign debt problems in Europe were getting too much attention, and that slightly lower economic growth in China was not a major cause for concern. Northern European economies, like Germany, were getting a boost from the weaker euro, which is helping exports of products like machine tools.

"A lot of investors are very concerned that perhaps Europe is going negative as a region, that the China recovery is falling apart, and we believe that is an over-reaction to short-term data."

Economic growth in China was down from an annual rate of 11.9 percent to about 10 percent.

"That's still really attractive growth," Cutler said. (Reuters)