Eaton Stock Buy or Sell?

The failure of key technologies can bring the world to a screeching halt with disruption to web access, the electrical grid, hospitals, factories, data centers, and transportation of goods and travelers. 

No one is more aware of the important role they play than companies in the business of power management.

Delivering and servicing power is a tremendous responsibility, and major industry players are continuously focused on improving reliability.

In some cases, that means helping users reduce demand so that there is energy available during peak use periods.  

Eaton Corporation plc (NYSE:ETN) is a prime example of the type of company that keeps power flowing. It serves more than 175 countries through four segments: Electrical Americas and Electrical Global, Aerospace, Vehicle, and eMobility.

Among other products, Eaton’s energy-saving gadgets help its customers reduce their consumption of electricity, water, and machine power. 

Eaton’s shares are performing well. Year-to-date, its stock has risen by nearly 40%, making it attractive to investors so can Eaton stock continue to grow? 

Key Partnerships Power Eaton’s Growth

It’s been a big year for Eaton and one of the most exciting developments occurred in Malaysia, where it partnered with SIA Engineering Company Limited to create a joint venture called Eaton Aerospace Component Services Asia Sdn Bhd. 

SIAEC owns 49% of the new company, and Eaton owns 51%. The joint venture is expected to improve Eaton’s capabilities in the maintenance, repair, and overhaul of aircraft parts throughout the Asia-Pacific region.

Eaton also invested in NordicEPOD AS to solidify its standing in the Nordic data center market. This should allow Eaton to provide advanced power modules and services to meet the growing need for integrated solutions in the European data center sector.

In potentially a game-changing move, it has expanded its collaboration with Palantir Technologies (NYSE:PLTR) to integrate the Palantir Artificial Intelligence Platform into Eaton’s work processes.

The aim of this integration is to enhance Eaton’s Enterprise Resource Planning systems through AI-driven data management solutions and to facilitate faster innovation so that Eaton can maintain its leadership status.

In another smart step, Eaton acquired Exertherm, a company best known for its high-quality thermal monitoring solutions for electrical equipment. Adding Exertherm’s technology to Eaton’s Brightlayer software collection is likely to enhance operations in data centers.

Finally, Eaton opened a modern assembly factory in Santiago de los Caballeros in order to satisfy the increasing demand for its Bussmann series fuses. The new factory gives Eaton the capacity needed to participate in global markets for electric cars, renewable energy, data centers, and other industries.

So how do all these deals, partnerships and collaborations translate to the numbers?

Eaton’s Financials Show Strong Growth Amid Global Trends

The market has placed a high demand on Eaton’s offerings across multiple markets, thanks to megatrends, reindustrialization, and increased infrastructure spending. All that has boded well for the financials.

In the fiscal first quarter of 2024, net sales rose by 8.4% to $5.94 billion compared to last year. Income before taxes was up by 31.4% from the same period in the previous year for a total of $1 billion.

The company’s adjusted earnings and adjusted earnings per share rose by 28.3% and 27.7% to reach $966 million and $2.40, respectively. Free cash flow grew by 39.7% compared to the earlier year’s quarter and hit $292 million.

The strong financials are mirrored by a solid history of growing dividends. Shareholders have received annual raises for the past nine years.

The company now pays $3.76 per share in dividends, corresponding to an annual yield of 1.26%. Eaton’s dividends have grown at a CAGR of 6.5% in the last three years, and its four-year average dividend yield is 1.94%.

Eaton recently announced a quarterly dividend of $0.94 for share and for those looking for stability, it’s hard to do better given that the company has paid dividends on its shares every year since 1923.

It’s no surprise to discover that such a long streak is only possible thanks to a profitable business model, exemplified by the company’s trailing 12-month gross profit margin of 37.06%, well above the industry average of 31.19%.

It also has a trailing 12-month EBITDA margin of 21.35%, higher than the sector average of 13.70%.

The company’s 12-month levered free cash flow margin of 10.52% has gone up by 65.5% compared to the industry average, which is at 6.35%.

Eaton’s Stock Forecast Is…

Last quarter management had forecast organic growth between 6.5% and 8.5% and expected segment margins to be between 22.4% and 22.8% alongside EPS in the range of $2.19 to $2.29. 

For the full year, the top brass increased the company’s organic growth forecast from between 6.5% and 8.5% to between 7% and 9%. 

EPS guidance has changed, too. It is now between $8.95 and $9.35, which is up 14% at the midpoint over the previous year.

The adjusted earnings per share forecast rose to between $10.20 and $10.60, up 14% at the midpoint over the prior year.

Eaton Stock Buy or Sell?

Eaton stock is a moderate Buy according to the 21 analysts covering it who have a consensus price target of $343.63 per share.

The sentiment has improved recently with 5 analysts revising their earnings estimates higher for the coming quarter.

If were you to sum up the pros and cons, the bulls can point to a strong history of paying dividends, a history of profitability in all markets, and liquid assets well in excess of obligations.

But the downside risk comes from an elevated level of long-term debt that now sits at $8.5 billion and a lofty valuation that may suggest a sharp pullback is in order at some point if a discounted cash flow target price of $251 per share is to be believed. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.