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Is Eaton Stock's 26.7X PE Still Worth it? Buy, Sell, or Hold?
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Eaton Corporation (ETN - Free Report) shares are trading at a premium compared to the Zacks Manufacturing-Electronics industry. Its forward 12-month Price/Earnings of 26.68X is higher than the broader sector’s 19.19X and the Manufacturing-Electronics Industry’s 22.78X.
Eaton’s near-term prospects look bright, given its VGM Score of B. The stocks with a high VGM Score are those with the most attractive value, best growth and most promising momentum compared with peers.
Eaton’s shares have gained 44.2% in the last year, outperforming its industry, sector and Zacks S&P 500 Composite’s return in the same time frame.
Eaton Outperforms Industry, Sector & S&P 500 Last Year
Image Source: Zacks Investment Research
ETN shares are trading above the 50-day moving average, indicating a bullish trend.
Image Source: Zacks Investment Research
Investors might ponder whether the premium valuation of Eaton is justified at this present moment. Let’s find out why Eaton commands a premium valuation.
Eaton’s Shares Trading a Premium on a P/E (F12M)
Image Source: Zacks Investment Research
Eaton’s Research & Development & Global Presence
Eaton’s approach to research and development (R&D), is focused on leveraging technology to design solutions that meet the needs of our customers today and into the future. Eaton continues to evolve, improving its manufacturing processes while strengthening its supply chain and ensuring teams are equipped with the required skills and knowledge of the latest engineering principles and practices to meet evolving market demands.
Eaton has laid out a 10-year plan that includes a $3 billion investment in R&D programs, which will allow the company to create sustainable products. Rising demand from Data centers, Commercial & Institutional and Industrial customers will require more advanced products and Eaton through its new product development, capture a sizeable chunk of orders from these markets.
Eaton’s products are supplied to around 175 countries and most importantly, this, in a sense, provides stability to the revenue generation ability of the company, as the loss of a customer will not have any significant impact on revenues and margins. Its diversified product portfolio offering energy-efficient solutions will help to serve a broad customer base.
Courtesy of the strong demand and improvement in different end markets Eaton operates, the company expects its organic revenue growth in the range of 8-9% and segment operating margin in the range of 23.3-23.7% for 2024.
Eaton Continues to Expand Through Acquisition
Eaton enjoys strong organic growth from its existing assets and further expands its operation through acquisition. In the first half of 2024, it completed three acquisitions, which further boosted its Electrical Global and Electrical Americas Business segments. These two business segments together contribute nearly 70% total revenues of the company.
Both these segments continue to receive orders from their customers. Eaton’s backlog growth, with orders, increased 29% and 16% in Electrical Americas and Electric Global, respectively, on a rolling 12-month basis. Eaton expects its Electrical Americas and Electrical Global to register an organic revenue growth of 11.5-13.5% and 2.5-4.5%, respectively, in 2024.
Eaton’s Return on Asset Better Than Industry
Eaton’s trailing 12-month return on assets is 10.62%, ahead of the industry average of 5.61%. Return on assets (ROA), measures how efficiently the company is utilizing its assets to generate profits. The current ROA of Eaton indicates that it is using its assets more resourcefully compared to its peers and generating a better return.
Image Source: Zacks Investment Research
Eaton’s Rising Earnings Estimates
Courtesy of strong performance and ongoing improvement in the end market conditions, Eaton revised its adjusted earnings per share in the range of $10.65-$10.75 for 2024, indicating an increase of 17% at the midpoint from the prior-year levels.
The Zacks Consensus Estimate for ETN’s 2024 and 2025 earnings per share has moved up 1.99% and 2.1%, respectively, in the last 60 days. The Zacks Consensus Estimate of fiscal 2024 earnings per share of Powell Industries (POWL - Free Report) , another operator in this space, moved up by 32.8% in the last 60 days.
Image Source: Zacks Investment Research
Eaton Raises Shareholder’s Value
Courtesy of its stable cash flow, the company has been increasing shareholder value through dividend payments and share repurchases. In 2024, it expects free cash flow in the range of $3.4-$3.6 billion compared with $2.9 billion in 2023.
Eaton continues to increase the value of its shareholders through share buybacks and regular dividend payments. In the first half of 2024, it repurchased 4.2 million shares for a total of $1.34 billion. The company has plans to repurchase shares in the range of $1.5-$2.5 billion in 2024.
Eaton also distributes regular dividends to its shareholders. ETN’s management has raised dividends for 15 consecutive years and raised its quarterly dividend rate during the first quarter of 2024. The current annual dividend is $3.76 per share, reflecting a dividend yield of 1.25%, better than its industry’s yield of 0.55%.
Summing Up
Eaton continues to benefit from stable contributions from its organic assets spread across the globe. Strategic acquisitions are further expanding its product portfolio and market reach.
Eaton upgrades the quality and develops efficient products through research and development work, that caters to the increasing demand of all customer classes.
Given Eaton’s positive movement in earnings estimates, strong return on assets, strong backlog and rising free cash flow generation, a premium valuation is justified for this Zacks Rank #2 (Buy) stock. Eaton is currently an ideal candidate to add to your portfolio.
Eaton Corporation (ETN - Free Report) shares are trading at a premium compared to the Zacks Manufacturing-Electronics industry. Its forward 12-month Price/Earnings of 26.68X is higher than the broader sector’s 19.19X and the Manufacturing-Electronics Industry’s 22.78X.
Eaton’s near-term prospects look bright, given its VGM Score of B. The stocks with a high VGM Score are those with the most attractive value, best growth and most promising momentum compared with peers.
Eaton’s shares have gained 44.2% in the last year, outperforming its industry, sector and Zacks S&P 500 Composite’s return in the same time frame.
Eaton Outperforms Industry, Sector & S&P 500 Last Year
Image Source: Zacks Investment Research
ETN shares are trading above the 50-day moving average, indicating a bullish trend.
Image Source: Zacks Investment Research
Investors might ponder whether the premium valuation of Eaton is justified at this present moment. Let’s find out why Eaton commands a premium valuation.
Eaton’s Shares Trading a Premium on a P/E (F12M)
Image Source: Zacks Investment Research
Eaton’s Research & Development & Global Presence
Eaton’s approach to research and development (R&D), is focused on leveraging technology to design solutions that meet the needs of our customers today and into the future. Eaton continues to evolve, improving its manufacturing processes while strengthening its supply chain and ensuring teams are equipped with the required skills and knowledge of the latest engineering principles and practices to meet evolving market demands.
Eaton has laid out a 10-year plan that includes a $3 billion investment in R&D programs, which will allow the company to create sustainable products. Rising demand from Data centers, Commercial & Institutional and Industrial customers will require more advanced products and Eaton through its new product development, capture a sizeable chunk of orders from these markets.
Eaton’s products are supplied to around 175 countries and most importantly, this, in a sense, provides stability to the revenue generation ability of the company, as the loss of a customer will not have any significant impact on revenues and margins. Its diversified product portfolio offering energy-efficient solutions will help to serve a broad customer base.
Courtesy of the strong demand and improvement in different end markets Eaton operates, the company expects its organic revenue growth in the range of 8-9% and segment operating margin in the range of 23.3-23.7% for 2024.
Eaton Continues to Expand Through Acquisition
Eaton enjoys strong organic growth from its existing assets and further expands its operation through acquisition. In the first half of 2024, it completed three acquisitions, which further boosted its Electrical Global and Electrical Americas Business segments. These two business segments together contribute nearly 70% total revenues of the company.
Both these segments continue to receive orders from their customers. Eaton’s backlog growth, with orders, increased 29% and 16% in Electrical Americas and Electric Global, respectively, on a rolling 12-month basis. Eaton expects its Electrical Americas and Electrical Global to register an organic revenue growth of 11.5-13.5% and 2.5-4.5%, respectively, in 2024.
Eaton’s Return on Asset Better Than Industry
Eaton’s trailing 12-month return on assets is 10.62%, ahead of the industry average of 5.61%. Return on assets (ROA), measures how efficiently the company is utilizing its assets to generate profits. The current ROA of Eaton indicates that it is using its assets more resourcefully compared to its peers and generating a better return.
Image Source: Zacks Investment Research
Eaton’s Rising Earnings Estimates
Courtesy of strong performance and ongoing improvement in the end market conditions, Eaton revised its adjusted earnings per share in the range of $10.65-$10.75 for 2024, indicating an increase of 17% at the midpoint from the prior-year levels.
The Zacks Consensus Estimate for ETN’s 2024 and 2025 earnings per share has moved up 1.99% and 2.1%, respectively, in the last 60 days. The Zacks Consensus Estimate of fiscal 2024 earnings per share of Powell Industries (POWL - Free Report) , another operator in this space, moved up by 32.8% in the last 60 days.
Image Source: Zacks Investment Research
Eaton Raises Shareholder’s Value
Courtesy of its stable cash flow, the company has been increasing shareholder value through dividend payments and share repurchases. In 2024, it expects free cash flow in the range of $3.4-$3.6 billion compared with $2.9 billion in 2023.
Eaton continues to increase the value of its shareholders through share buybacks and regular dividend payments. In the first half of 2024, it repurchased 4.2 million shares for a total of $1.34 billion. The company has plans to repurchase shares in the range of $1.5-$2.5 billion in 2024.
Eaton also distributes regular dividends to its shareholders. ETN’s management has raised dividends for 15 consecutive years and raised its quarterly dividend rate during the first quarter of 2024. The current annual dividend is $3.76 per share, reflecting a dividend yield of 1.25%, better than its industry’s yield of 0.55%.
Summing Up
Eaton continues to benefit from stable contributions from its organic assets spread across the globe. Strategic acquisitions are further expanding its product portfolio and market reach.
Eaton upgrades the quality and develops efficient products through research and development work, that caters to the increasing demand of all customer classes.
Given Eaton’s positive movement in earnings estimates, strong return on assets, strong backlog and rising free cash flow generation, a premium valuation is justified for this Zacks Rank #2 (Buy) stock. Eaton is currently an ideal candidate to add to your portfolio.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.