The Long Case for Eaton Corporation

| About: Eaton Corp. (ETN)

Eaton Corporation (NYSE:ETN) is another large industrial machinery company that is experiencing phenomenal growth. Their recent earnings report came in at a stellar $1.60 compared to estimates of $1.38. Since then Wall Street analysts have written a string of love letters about the firm applauding their efforts to date and attractive upside potential to come.

What do they do?: Eaton is a global diversified industrial manufacturer leading the way in fluid power systems, electrical power quality and controls, automotive air management and fuel economy, and intelligent truck components for fuel economy and safety. Not the most exciting industry. But who ever said that exciting industries is where you make money in stocks?

Earnings Growth: They are enjoying modest growth in the US given our lukewarm economy. The real growth story is taking place in developing markets in Asia and South America. A weakening US dollar certainly helps to further the attractiveness of this story.

After getting beaten down by the Great Recession, just like everyone else, they are now reemerging with great vigor. This year earnings will come in about 114% higher than 2009 at around $5.55. New estimates for next year are coming in more like $7 given the big earnings surprise. Note that in 2008 before the global meltdown, they were on pace to earn $9 per share. So still plenty of upside for them to get back to peak profitability.

Valuation: Traditionally shares have traded at a PE of 14-15. Applying that to the $7 estimate for next year comes up with a reasonable valuation range of $98 to $105. That provides attractive upside in the near term along with their solid 2.64% dividend yield. Looking out to the long haul, Eaton is on the road to get back to peak earnings of $9 per share. That provides upside potential to $126 to $135 over the next couple years.

Timeliness: The company clearly has fundamental momentum on its side with estimates flying higher and a Zacks Rank of 1 (Strong Buy). Looking at the technical picture the stock is firmly above the 50 and 200 day moving averages pressing towards new highs.

Peers: Overall the industrial/machinery group is amongst the most attractive as the growth of emerging markets has provided a boon to these operations. Eaton is certainly a top name, but some others deserve your attention as well like Cummins (NYSE:CMI), Dresser-Rand (NYSE:DRC), Floserve (NYSE:FLS), and Parker Hannifin (NYSE:PH).

When you put all the pieces together you will be hard pressed to find a more attractive stock at this time than Eaton.

Disclosure: Of course I own shares in Eaton. Why else would I recommend it to others? I also own shares of Cummins.