What Sets Eaton Apart as a Top Industrial Stock?

Sustainable energy has gone from an emerging to an established industry, and companies around the world are making the move to less expensive, environmentally friendly alternative power sources.

The big names in energy and power management know they must adapt to remain competitive, and many are making the required adjustments to integrate sustainability into their operations. 

Eaton Corporation plc (NYSE:ETN) has positioned itself as a leader in power management, and it has enjoyed tremendous success over the past five years. Share prices have increased by approximately 278% during that period, which is significantly higher than the market as a whole. 

Can Eaton adapt to the rapid changes in the power management industry? Can it retain its position as a market leader? In short, is Eaton stock a buy? 

Eaton’s Roots Stretch Back All The Way to Ireland

Eaton has been a major player in the industrial sector for more than a century. Its roots go back to Dublin, Ireland, where it was founded during a time when the transportation industry was going through a different type of transformation.

Joseph Eaton saw an opportunity in the introduction of the gear-driven truck axle, and he immediately invested. Eaton Corporation launched in 1911, and it started trading on the New York Stock Exchange in 1923. 

Eaton made its name with a successful vehicle business, but it has since expanded into complementary fields via numerous acquisitions and now holds some of the most used electrical equipment and services in the world, including the Cooper Power series, the Cutler Hammer series, and the Bussmann series. 

These days Eaton is best known for products and services related to data centers, utilities, commercial applications, aerospace, and industrial markets.

As the world became more electrified so too did Eaton’s end markets grow and now it can be found in more than 160 countries worldwide.

Perhaps more importantly, Eaton’s success has been rooted in product and service diversification. Management has deliberately selected markets ripe for accelerated growth with a focus on power management, for example via the Eaton Business System (EBS).

Growth Persists Year after Year, Quarter after Quarter

Eaton has a long history of growth, and on the rare occasion that it sees a decline, the underlying cause tends to be unusual external factors. For example, the last time Eaton experienced a drop in sales was during the pandemic – a period that shut down many industrial operations. Eaton rebounded well and hasn’t had a down year since.

Over the past three years, annual net sales have accelerated, coming in at $19.63 billion for fiscal 2021 before growing by 5.7% year-over-year to $20.75 billion for fiscal 2022. That figure expanded by 11.8% for a total of $23.20 billion in fiscal 2023.

Although Eaton originally operated in the automotive sector, the company’s vehicle segment is no longer its primary source of revenue. As of last year, Electrical Americas was the biggest contributor to top line results, making up 43.5% of total revenue.

Electrical Americas was followed by Electrical Global, which carried 26.2% of the top line. Together, electricals made up 69.8% of Eaton’s 2023 net sales, and that percentage is on the rise. 

Eaton has also had success on the margin front. GAAP net income totaled $2.15 billion in 2021 and grew 14.9% to $2.47 billion in 2022 before further climbing by 30.8% to $3.22 billion in 2023. 

The upbeat reports continued this year with the first quarter of fiscal 2024 net sales improving by 8.4% year-over-year to $5.94 billion, a Q1 record. Except for the Electronics Global segment, which remained flat year-over-year, all the other segments posted gains for the quarter.

Adjusted earnings per ordinary share went up by 27.7%, which came to a record total of $2.40 for the first quarter. It is also worth noting that Eaton’s backlog posted a growth of 27% in Electrical and 11% in Aerospace. This demonstrates a strong demand for Eaton’s products and services.

The future is looking bright too. A recent shareholder letter highlighted the fact that Eaton has invested in growing manufacturing capacity to support sustainable power solutions. Management has committed to putting more than $1 billion into further production capacity.

Eaton Corporation Has a Solid Dividend

Eaton has paid dividends on its shares every year since 1923, when it started trading publicly. It last declared a quarterly dividend in April of $0.94 per share, which was paid to shareholders in May.

This comes out to an annual dividend rate of $3.76 per share with a yield of 1.12% at the current share price. 

While this yield is not particularly attractive, it is reliable – and dividend payouts have grown at a 6.5% CAGR over the past three years. Eaton’s payout ratio of 36.55% ensures that dividends are sustainable long-term. 

Is Eaton Corporation Stock A Buy? 

Wall Street analysts see a modest 6.8% upside over the next 12 months to fair value of $353 per share. Notably a discounted cash flow forecast is much more pessimistic and has intrinsic value sitting down at $251 per share.

The fact that Eaton is adding multiple clean energy projects in a variety of countries over the next two years is promising, and the company’s high backlog signals strong demand. 

Add to that the perfect Piotroski Score of 9 and there’s a lot to like about Eaton as a top industrial stock at the moment. With a century of growth behind it, Eaton isn’t a stock to bet against anytime soon.

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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.