Current Price: ~ $52/share

Projected Yield: ~ 2.62%

Projected Yield: ~ 2.62%

Eaton provides power management solutions to diversified industrial customers, including electrical systems, hydraulics components, aerospace fuel systems, and truck and auto powertrain systems. Products include UPS systems, hydraulic pumps, cylinders, clutches, and circuit breakers. The company sells to both original-equipment manufacturers and aftermarket customers, and generates over 50% of its sales outside of the U.S.

I estimated the firm's WACC today at 13.88% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and growth rates:

Year |
FCF $Millions |

2001 |
470 |

2002 |
672 |

2003 |
601 |

2004 |
508 |

2005 |
772 |

2006 |
1071 |

2007 |
807 |

2008 |
968 |

2009 |
1213 |

2010 |
888 |

TTM |
696 |

Average Annual Growth FCF: ~ 11%

CAGR FCF: ~ 7%

Consensus Forecast Industry 5-Year Growth: ~ 17% per yearConsensus Forecast Company 5-Year Growth: ~ 13% per year

**Scenario 1**

Average FCF in last three years is $1023 million. Starting at $1023 million FCF, assuming the company achieves a 5-year growth rate in FCF of 13% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:

Discounted Cash Flow Valuation

Year |
FCF $Millions |

0 |
1023 |

1 |
1156 |

2 |
1306 |

3 |
1476 |

4 |
1668 |

5 |
1885 |

Terminal Value |
15340 |

The firm's future cash flows, discounted at a WACC of 13.88%, give a present value for the entire firm (Debt + Equity) of $13,004 million. If the firm's fair value of debt is estimated at $3744 million, then the fair value of the firm's equity could be $9260 million. $9260 million / 341 million outstanding shares is approximately $27 per share and a 20% margin of safety is $22/share.

**Scenario 2**

Starting at $1023 million FCF, assuming the company achieves a 5-year growth rate in FCF of 13% per year, and then a growth rate in FCF of 7% per year forever:

Discounted Cash Flow Valuation

Year |
FCF $Millions |

0 |
1023 |

1 |
1156 |

2 |
1306 |

3 |
1476 |

4 |
1668 |

5 |
1885 |

Terminal Value |
30936 |

The firm's future cash flows, discounted at a WACC of 13.88%, give a present value for the entire firm (Debt + Equity) of $21,146 million. If the firm's fair value of debt is estimated at $3744 million, then the fair value of the firm's equity could be $17,402 million. $17,402 million / 341 million outstanding shares is approximately $51 per share and a 20% margin of safety is $41/share.

**Disclosure:**I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.