About Eaton
Eaton Corporation has been around for a very long time.
Founded in 1911, the multinational company has been a premier provider of energy management services for people all around the globe. While the company is headquartered in Dublin, Ireland, the company maintains extensive operations in the United States, specifically in Ohio and Pittsburgh as they offer virtual tours of some of their facilities at this link!
At its core, Eaton is a power management company. From circuit breakers and boards to power distribution units and other power systems that are likely used in your neighborhood, Eaton is a huge corporation that is not often analyzed or discussed by the talking heads.
Before we dive into the company’s financials, we feel it is important to also mention that Eaton is not merely a gigantic power manager but also an aerospace technology company, a renowned electricity company and also plays a considerable role in the transportation (rail, marine and other vehicles) and healthcare industries as well.
We mention this in order to emphasize that this is a large company with a core focus (energy and power management) that operates in many different but important sectors.
However, even if the company is interesting our objective is to achieve a return on our investments in the long run.
In order to figure out whether Eaton has a good chance of providing such returns, let’s get to know the company’s financials.
Eaton’s stock financials
The company currently has a share price of around $138 and a price-to-earnings (P/E) ratio of nearly 25.6. Given this initial information, the company’s current share price does appear to be modestly overvalued with the P/E ratio eight points above the benchmark of 20.
It is generally said that if a stock’s P/E ratio is 20, the stock is currently trading at fair value whereas if the company’s share price is trading above 20, it is said to be overvalued and if below 20, undervalued.
Although the company’s stock seems to be objectively overvalued, let’s get a better idea of how strong Eaton’s financials are.
First off, the company offers an annual dividend of $3.24 which is nothing to sneer at.
Second, Eaton does not have a good balance sheet; they have a stellar balance sheet.
Specifically, the company manages around $34 billion in total assets and approximately $17.6 billion in total liabilities, of which nearly $7 billion is long term debt.
Even though the company clearly has many operations worldwide, they still appear to keep a lean balance sheet.
Peering over to the company’s income statement, their total revenue has been essentially flat to negative over the past four to five years. For instance, in 2019 Eaton’s total revenue was nearly $21.4 billion and slumped the next year to roughly $17.9 billion.
We don’t give much long-term credence to this drop simply because it happened during the pandemic, when the (business) world was in an absolute state of chaos and uncertainty. Even though this was the case, Eaton still managed to achieve a solid amount of revenue (when compared to recent history) likely because no matter the state of the world, many (if not most) of Eaton’s services are essential.
Additionally, we’re not too worried because the company’s total revenue has since crept back up to higher levels in 2021 at around $19.6 billion.
Nonetheless, in the long run it seems like Eaton’s total revenue is going to be somewhat flat and consistent in the $20 billion area code.
Onto the last of the financial big three, the company’s cash flow statement tells a similar story.
Eaton’s stock fundamentals
For example, Eaton’s net income has floated around the $2 billion range, which is a good sign as well. Constant fluctuations in net income worry us, especially if it’s related to an established company or industry leader. It’s understandable if a relatively new publicly traded company such as DoorDash or Snowflake (just random examples) has some ups and downs as it relates to net income; this could mean they are investing aggressively in the business and trying to better the future prospects of the company.
However, this is not the case for a company that has been around for over a century.
Suffice it to say we are at peace with the lack of relative growth and oscillations in both Eaton’s income statement and cash flow statement.
Now, when it comes to producing a profit, Eaton does a fantastic job compared to the industry. This is one of the perks of being an industry leader in a highly regulated industry paired with having considerable economies of scale. Their ability to make a substantial profit can also likely be attributed to their increased market share as a result of previous strategic acquisitions, namely their 2012 purchase of electrical manufacturer Cooper Industries.
Additionally, the company’s annual return on equity and assets are higher than that of the industry while their annual return on investment is basically in line with the industry average.
Should you buy Eaton stock?
Over 100 years of service must mean you’re doing something right!
No matter how bad the economy gets or how shaken consumers become, there will always be power to manage and industries that rely on the dependability and efficiency that Eaton seems to offer.
Given that the current stock price is modestly overvalued, the company operates in many different business segments, their incredibly strong balance sheet and other financial metrics, we give Eaton a “hold” rating, mainly because the stock appears to be overvalued.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.