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The last time I wrote about Eaton Corp. plc (ETN) I bought a small position in it stating "I'll deploy about a quarter of my capital that I normally would to buy more shares with the expectation that I'll buy more as the price comes down." It did drop 4.5% about a month after the article but has since rebounded. I believed it could get to around $63.65 and it actually hit $63.08 and catapulted back up after that. Since the last article it actually shot up 9.67% versus the 4.23% gain the S&P500 (SPY) posted. Eaton is a global technology leader in electrical components to the aerospace and automotive industries, both of which are hot industries right now. On October 25, 2013, the company reported third quarter earnings of $1.12 per share, which was in-line with the consensus of analysts' estimates. In the past year the company's stock is up 46.45% excluding dividends (up 48.42% including dividends), and is beating the S&P 500, which has gained 29.11% in the same time frame. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial, and technical basis to see if it's worth buying more shares of the company right now for the technology sector of my dividend growth portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 21.5, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 14.84 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $4.88 per share and I'd consider the stock inexpensive until about $73. The 1-year PEG ratio (1.17), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced based on a 1-year EPS growth rate of 18.44%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 18.44%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 13.04%. Below is a comparison table of the fundamentals metrics for the company from the last time I wrote the article to now.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

05Aug13

66.06

19.43

12.74

5.19

77

1.62

12.01

13Nov13

72.45

21.5

14.84

4.88

73

1.17

18.44

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 2.32% with a payout ratio of 50% of trailing 12-month earnings while sporting return on assets, equity and investment values of 4.4%, 10.1% and 4.7%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 2.32% yield of this company is good enough for me to take shelter in for the time being. Below is a comparison table of the financials metrics for the company from the last time I wrote the article to now.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

05Aug13

2.54

45.6

4.7

11.1

4.7

13Nov13

2.32

50

4.4

10.1

4.7

Technicals

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock muddling around near overbought territory with a value of 63.54. I will look at the moving average convergence-divergence (MACD) chart next and see that the black line is above the red line with the divergence bars increasing in height, indicating a bullish pattern. As for the stock price itself ($72.45), I'm looking at $73.51 to act as resistance and the 20-day simple moving average (currently $69.87) to act as support for a risk/reward ratio, which plays out to be -3.56% to 1.46%.

Recent News

  1. The company reported third quarter earnings of $1.12 per share on revenue of $5.61 billion versus expectations of $1.12 and $5.52 billion.
  2. The company declared a quarterly dividend of $0.42 per share with an ex-date of 31Oct13 and pay date of 22Nov13.

Conclusion

CEO Sandy Cutler was recently on Jim Cramer's show and stated that in 2014 there looks to be a big turn in construction spending for the good. The day the company reported earnings it was down about 1% then sky rocketed to be up 5% on that day. Fundamentally the stock is fairly valued on future earnings and future growth and I believe that the current price is adequate. The company also has excellent short-term and long-term earnings growth prospects. Financially the stock has deteriorating returns on assets and equity. The technical situation tells me that the stock is in overbought territory. However, I believe it may move up for a bit more then hit resistance and drop. The overbought situation of the stock, the drop in return on assets, and drop in return on equity make me want to stay away from the stock for now as it shot up quite a bit after earnings. I am holding onto my position for the long term and hope I can buy some more shares at a cheaper price.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Source: The 2.32% Yield On Eaton May Go Higher