Buy Eaton While It's Still Cheap

| About: Eaton Corp. (ETN)

There's no question that industrial stocks have been sliding as of late. With a pessimistic economic outlook (which includes a dangerous fiscal cliff, the eurozone crisis, and slowing growth in China, just to name a few), you can't say that investors don't have a reason to be worried. But instead of letting all of these red flags stress you out, you should really start getting excited. The market has discounted many industrial stocks, presenting a great opportunity to scoop them up for cheap.

Although there are so many undervalued industrials on the market, there's one that I find particularly attractive; and that would be Eaton Corporation (ETN), an industrial goods company specializing in electrical equipment. In the past year, Eaton has underperformed the S&P 500 (^GSPC) by a wide gap of about 29%, as the S&P has gained 3% and Eaton has declined 26%. To compare performance, Parker-Hannifin Corporation (PH), a similar industrial goods company, has lost about 15% in the past year, while the industrial poster child Caterpillar Inc. (CAT) has almost exactly tracked Eaton for a 25% loss.

Recent stock performance might not be so stellar, as for pretty much any industrial stock; but that's just good news for the value investor. Something is only worth what someone is willing to pay; and while people might be willing to pay $40 today, they could be paying twice that five years down the road. I'm not saying that investing in Eaton is going to double your money, at least for now; but Eaton definitely has some underlying value which the market has yet to realize. Here are just a few numbers to give you an idea.

  • Market Cap: $12.82 billion
  • Current Share Price: $38.09
  • 52 Week Range: $33.09-$52.23
  • Trailing P/E: 9.49
  • Forward P/E: 7.56
  • PEG: 0.84
  • Price/Book: 1.57
  • Operating Margin: 10.37%
  • Profit Margin: 8.48%
  • Return On Equity: 17.45%
  • Total Cash: $811.0 million
  • Total Debt: $3.76 billion
  • Current Ratio: 1.65
  • Dividend (%): $1.52 (4.00%)
  • Payout Ratio: 35%

(Find more stats here.)

By many metrics this stock appears to be relatively cheap. A forward P/E below 8, a PEG below 1, strong operating and profit margins, a strong balance sheet, and an extremely healthy dividend all indicate a solid investment. The dividend is really what I find most attractive; it has been paid consistently for 26 years and has doubled since 2006, with much more room to grow. While Parker-Hannifin and Caterpillar also pay dividends, they only yield 2.2% and 2.5%, respectively.

Average analyst estimates point to an EPS of $5.04 by next year. If that number is accurate, and we assume that Eaton's P/E multiple remains at 9.49, then it would be trading at $47.83. If this conservative price target was to be reached, that would be a 25.6% appreciation. Analysts have slapped a more liberal $55.50 price target, which makes for a 45.7% upside.

If you're more focused on the long term picture rather than short term earnings, then you should be excited that management is making strategic acquisitions to expand its business. Eaton just recently completed its acquisition of Jeil Hydraulics Co., Ltd., a South Korean manufacturer of products for the construction equipment market. Also, in late May, Eaton announced its intention to purchase Cooper Industries plc (CBE), an electrical equipment supplier. This acquisition still needs to be approved by shareholders of both companies; but if it goes through, Eaton's market position will be strengthened.

The past year hasn't been too kind to Eaton shareholders; but if you take your eyes off of the charts for a minute and look at Eaton's fundamentals, it seems like an absolute steal right now. Five or ten years down the road, investors will be kicking themselves for passing up this opportunity; but don't let that happen to you.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ETN over the next 72 hours.

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