With a day's gain of 4.35% and an Earnings Per Share (EPS) of 6.41, Eaton PLC (ETN, Financial) has been gaining investor's attention. But the question arises, is the stock modestly overvalued? In this analysis, we delve into Eaton PLC's intrinsic value, financial strength, profitability, and growth to provide a comprehensive outlook.
A Brief Introduction to Eaton PLC (ETN, Financial)
Eaton Corp PLC (ETN) is a diversified power management company with a rich history of over 100 years. With a market cap of $85.4 billion, it operates through various segments, including electrical Americas, electrical global, aerospace, vehicle, and eMobility. Its portfolio serves a wide range of end markets, from commercial vehicles and general aviation to data centers, utilities, and residential markets. Despite its Ireland domicile for tax purposes, most of Eaton's operations are based in the U.S. The company's stock price stands at $214.26, against a fair value (GF Value) of $170.33, raising questions about its valuation.
Understanding the GF Value of Eaton PLC
The GF Value is a proprietary measure that determines a stock's intrinsic value. It factors in historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line represents the fair trading value of the stock. If the stock price significantly surpasses the GF Value Line, it is overvalued, suggesting potentially poor future returns. Conversely, if it lies significantly below the GF Value Line, it could be undervalued, indicating potentially higher future returns.
For Eaton PLC, the stock appears to be modestly overvalued. With a stock price of $214.26 per share, Eaton PLC's stock trades above its GF Value of $170.33. Consequently, the long-term return of its stock is likely to be lower than its business growth.
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Evaluating Eaton PLC's Financial Strength
Companies with poor financial strength pose a high risk of permanent capital loss. Therefore, it's crucial to review a company's financial strength before investing. Key indicators like the cash-to-debt ratio and interest coverage offer valuable insights. Eaton PLC has a cash-to-debt ratio of 0.06, ranking worse than 94.86% of companies in the Industrial Products industry. However, its overall financial strength is 6 out of 10, indicating fair financial health.
Profitability and Growth of Eaton PLC
Investing in profitable companies, particularly those with consistent long-term profitability, is generally less risky. Eaton PLC, with an operating margin of 14.85%, ranks better than 82.69% of companies in the Industrial Products industry. Its overall profitability is ranked 8 out of 10, indicating strong profitability.
However, growth is a crucial factor in a company's valuation. Eaton PLC's 3-year average revenue growth rate lags behind 70.6% of companies in the Industrial Products industry, and its 3-year average EBITDA growth rate is 4.6%, ranking worse than 59.35% of companies in the industry. This indicates a need for improvement in the company's growth performance.
ROIC vs WACC: A Closer Look at Eaton PLC's Profitability
Return on invested capital (ROIC) and the weighted average cost of capital (WACC) offer another perspective on a company's profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business, while WACC is the rate that a company is expected to pay on average to finance its assets. Ideally, ROIC should be higher than WACC. For Eaton PLC, the ROIC is 8.41, falling short of its WACC of 8.73, signaling a need for improvement.
Conclusion
Overall, Eaton Corp PLC (ETN, Financial) appears to be modestly overvalued. Despite its fair financial condition and strong profitability, its growth performance and ROIC vs WACC comparison indicate areas for improvement. To learn more about Eaton PLC's stock, check out its 30-Year Financials here.
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