A Financial Analysis of Eaton Corp.

Dennis Biray
 


Visitors: 374
 1 vote

The industrial electric equipment industry is one without a lot of recognition. While there are a few large capitalization companies such as Rockwell Automation, ABB, and Nidec, only Eaton Corporation (ETN) seems to receive any type of coverage from news outlets. Nevertheless, I believe a lot of such coverage is warranted, as this company has the proper fundamental and strategic business plans to excel and contribute to capital gains for your portfolio.

Examining over the business plan of Eaton, according to Reuters, this company takes on a diversified information system structure, overlooking, “the design, manufacture, marketing and servicing of electrical systems and components for power quality, distribution and control; fluid power systems and services for industrial, mobile and aircraft equipment, " among others. In addition, with a variety of four segments the company has influence over, (Electrical, Fluid Power, Truck, and Automotive) Eaton takes a fairly defensive role in relation to the rest of the market. What this indicates is that during times of economic slowdown or economic prosperity, Eaton will not fluctuate too much in one direction. In fact, with a fairly low beta of about 1.6, Eaton, over the course of the previous 52 weeks, has grown relative to share prices almost 14.50%. Comparing this number to the S&P 500, which over the same time had grown about 6.50%, there is clear indication that this stock is not as volatile as some of its competitors.

The most important technical factor I see from this business strategy, however, is the near linear growth pattern of Eaton since it began to trade publicly in 1985. Referring back to only the previous 12 years, Eaton has only had one major correction in the first quarter of 1998 when it fell about 25%. Nevertheless, because Eaton has a large capitalization status of almost 12.2 billion dollars, second in the industry only to ABB, regardless of the scrutiny that may be placed on some of its fundamentals, this company has the historical evidence to suggest further share price growth. In addition, with its recent acquisitions over the past year, according to Reuters, of “Senyuan International Holdings Limited; the remaining 50% interest in Schreder-Hazemeyer; the diesel fuel processing technology and associated assets of Catalytica Energy Systems Inc. ; the Ronningen-Petter business unit of Dover Resources, Inc. , " among others, the synergies that will evolve will only help continuing economies of scale to form, adding to more profitable margins which will only add optimism to current and potential shareholders.

While the business plan suggested is solid, a strong fundamental background is necessary for this company to adequately control its means of production. Looking at the top line, this company has seen revenue growth over the past year at a quarterly rate of 10%. While the number is about in line with industry competitors, its revenue per share, according to Capital IQ, of 82.36 annihilates Rockwell Automation's 32.39, ABB's 11.47, and Nidec's 8.93. Moving towards the bottom line, relative to net income, last year's quarterly earning's growth of about 15%, while not as astonishingly high as the triple digit growth illustrated by Rockwell or as astonishingly low as the negative double digit decline illustrated by Nidec, does indicate stability where future guidance and expectations will not be to dramatically surprising for shareholders. In addition, with the future earnings growth expected, Eaton is looking for a forward P/E ratio of around 11 which is not only lower that is trailing multiple, but more than marginally lower than the industry's number of 35.80 as well. In addition, comparing this number to ABB's 15.33, Nidec's 22.47, or Rockwell's 14.37, whose forward multiple is higher than its trailing, there is some clear indication that Eaton is significantly undervalued compared to its industry competitors.

Looking at even more comparable multiples, Eaton's price to sales, enterprise value to revenue, and enterprise value to EBITDA are, respectively, 0.97, 1.12, and 8.42. Comparing these numbers to Rockwell's respective numbers of 1.76, 1.92, and 9.83, ABB's respective numbers of 1.46, 1.46, and 11.85, and Nidec's respective figures of 1.79, 1.81, and 12.01, there is even further evidence to stimulate the notion that Eaton, regardless of being nears its 52 week high, is still fairly undervalued. Furthermore, its PEG, with growth accounted for over the next five years, of 1.18 is near industry level for large caps, and again illustrates that there is still a lot of potential for growth for both this industry and corporation. However, while these numbers do look promising, there may be some skepticism regarding this company and its various returns. Eaton's ROE of about 23%, while above the industry average, is still lagging a bit relative to competitors such as Rockwell and ABB. In addition, the ROI and return on assets of 11.95, and 8.43 are actually below the industry averages.

Now, while CEO Alexander Cutler and the companies 60,000 employees are performing at a solid rate, there may be a bit of potential for the company to set aside some more cash to capital spending to further potential growth and returns, as its five year capital spending rate of 4.6 is slightly below industry average as well. However, regardless, the company, speaking in terms of bare fundamentals is still to be said as a value, rather than growth, stock, and will perform quite nicely over the long term. To add to this, its balance sheet is quite strong with a below 0.5 LT debt to equity ratio and a current ratio of about 1.29. Overall, this company is a very reputable one and will continue to perform like an industry leader over the next couple of years with its strong fundamentals.

Therefore, while the 50 and 200 day SMA are a bit below the current share price, there still should be no reason, given the fundamental and business strategies, to be reluctant in purchasing shares of this stock. With a dividend payout of 2.10%, higher than all the aforementioned companies, coupled with a low short ratio, many investors are still quite bullish on Eaton and should be, given the both recent and historical evidence. Thus, while many of my recommendations deal with low large-cap or standard mid-cap equities, I see strong potential by placing some of your capital into Eaton.

Dennis Biray presents advice on all kinds of topics ranging from finance and investing to fitness to sports. For more information email him at dbiray@gmail.com , or to view other articles written by him visit http://www.biraynetworks.co.nr

(1049)
Tags:
, , , , , ,

Article Source:


 
Rate this Article: 
 
A Financial Analysis of Kongzhong Corporation
Rated 1.0 / 5
based on 1 vote
ArticleSlash

Related Articles:

A Financial Analysis of Barrick Gold Corp

by: Dennis Biray (March 30, 2007) 
(Finance)

Financial Needs Analysis

by: Christopher Goh (July 02, 2007) 
(Finance)

A Financial Analysis of Wyeth

by: Dennis Biray (February 16, 2007) 
(Finance)

A Financial Analysis of WellPoint Inc

by: Dennis Biray (April 27, 2007) 
(Finance)

Financial Statement Analysis

by: Rashid Javaid (March 04, 2010) 
(Business/Accounting)

A Financial Analysis Of Moog Inc

by: Dennis Biray (July 06, 2007) 
(Finance)

A Financial Analysis of Praxair Inc

by: Dennis Biray (June 24, 2007) 
(Finance/Stocks Mutual Funds)

Discover Eaton Canyon In Pasadena California

by: David Hallstrom (June 21, 2005) 
(Travel and Leisure/Outdoors)

A Financial Analysis of Donaldson Company Inc.

by: Dennis Biray (February 23, 2007) 
(Finance)

A Financial Analysis of Kongzhong Corporation

by: Dennis Biray (January 12, 2007) 
(Finance)