Eaton: Unappreciated New-Age Stock - Barron's

Barron's says Wall Street has yet to appreciate Eaton's (ETN) increased focus on energy-saving breakthroughs that are driving sales by saving its customers money.

Once highly-dependent on autos and heavy trucks, CEO Sandy Cutler has cut auto and truck sales to just 28% of the parts supplier's revenue (from 38% in 2000), shifting its focus to other areas such as power management for datacenters and hydraulic systems for jets.

Earnings growth is an average 22% over the past five years; it expects another 17% this year. Yet shares trade for just 12x earnings, one of the lowest ratios in its group, and way short of its own average of 16x. Analyst Eli Lustgarten calls Eaton, "by far one of the cheaper industrial stocks," and says shares could gain 20% to $117 over the next year.

Its dividend yields 2.1%, and its debt-to-market-cap ratio is a manageable 30%. More than half of its 2008 revenue will come from abroad, leading Eaton to brand itself a "premier diversified industrial." Still, CEO Cutler is optimistic even about Eaton's domestic growth, particularly its exposure to petroleum, medical, power generation and mining, some of which are growing at double-digit rates.

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Recent delays to Boeing's (BA) 787 may cause airlines to run existing planes harder -- requiring more maintenance and replacements. Jeffrey Lin thinks Eaton is a better buy than GE (GE).

Cramer recently suggested sticking with bullish themes that have a future -- stocks like Eaton that can solve real problems such as energy, food, water, and the environment.

Comments

[AJ,WashingtonDC]

In that case, wouldn't GE be a great buy? They are heavily invested in Water technology, Environmentally friendly energy (Wind Turbines), traditional energy - Gas turbines and nuclear reactors, nanotechnology etc. Why are they being beaten down in spite of their stellar dividends and long term great positioning?

[Tom B]

I'm with you on GE, and I'm looking at ABB and Siemans for the same reasons.

[gthomas]

Comparing the two my bet is on GE. looks like Eaton is at it's fair value today. Similiar PE's. GE div. Kick A.. Jeff E. has positioned the business for dramitic growth in the future. Sorry Eaton no sale here

[livinintheusa]

If you pick your favorite chart site and compare GE and ETN for 3 months or 5 years you will see why ETN is prefered. The key is to look where both are going in pps right now and over time. Catch the general trend. I choose not to state my opinion but to let the numbers do the talking. ETN is making money and the pps over time has performed well in comparison to GE. It is not hard to see on the graph, check it out before you listen to any of us. DD is required!

[bullwinkle]

The main problem I see with GE is that it still has a fairly high P/E considering that it is about 50% financial. A typical industrial stock trades around 13x and a typical financial these days trades around 9x, which suggests that a fair multiple for GE should be around 11x rather its current estimate of about 13-14x. This is a very hazy valuation methodology, but it suggests that the stock could drop another 15-20%, to around 25. The dividend yield is very appealing, however, and the stock seems to be forming a base around the 30 level, so if financials start picking up this stock should do better. However, if financials stay under pressure I think GE could go lower.