Last time I took a look at Eaton (ETN), the stock looked bearish in nature but I took the position that it would be a great buy in 2012. That article was written in April. The stock did continue to move down from 46 to about 38 but has since rebound to about the "53" level and continues to look bullish as the year ends. Why is the stock growing right now? It is important to understand that almost 50% of Eaton's revenue comes from electrical where it builds industrial components for manufacturing. Goring back to the original question, I would like to refer back to my past article when I wrote:
"The thing about this segment is that it follows seasonal changes, where the business gets much stronger in the second, third and fourth quarter. For this reason, it makes sense that the stock is down in the first quarter. It makes sense why the projected growth for the second quarter is twice that of the first quarter."
It makes sense that the stock would be rising about now.
J.P. Morgan & Co. reiterated its Overweight rating on Eaton Corp., and raised its price target from $55.00 to $60.00. A key reason for this is the merger and acquisition of Cooper Industries. With the merger finalized, the capital raised and debt expectations have been smaller than expected. The weighted interest expected on the debt is only going to be 2.74% and this is a nice surprise for investors. Bank of America is another analyst that continues to look favorably on Eaton. It reiterated a buy rating with a price target of $62.00 in mid December.
Eaton is at the top of every industry it competes in. The close of Cooper November 30th exposes Eaton to electrical equipment that is very much in demand in the utility fields. Networks in the Northeast need to be updated and this sits well for Eaton. It will increase as energy efficiency worldwide becomes the norm and this is the field Eaton excels. The Cooper business is all band new for Eaton.
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Technically Speaking
Eaton has been especially strong as the year ends. After a move up in summer, it spend much of the fall consolidating before it started on its second leg up as November started. Since that time, the stock has grown in value by 20%. How strong is the present trend? Presently the stock is using the middle Bollinger band as support and this signifies the second strongest bullish trend possible. The RSI also has remained above the "50" line the whole time and the MACD supports strength in the RSI. The stock is still very strong and shows no sign of slowing down.
The Options Play
Presently trading at 52.07 I am suggesting a bullish spread trade:
- Buy the February call with a strike of '52.50' (priced at $2.30)
- Sell the February call with a strike of '55.00' (priced at $1.00)
- Net debit to Start: $1.30
- Maximum Profit: $0.70
- Maximum Risk: net debit
- Maximum Length of Trade: 2 months
Reasoning behind the Trade
- Analysts are bullish on the stock
- Stock is trending very bullish still
- Electrical Market looks favorable to Eaton in 2013
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
