Former hedge fund manager and current TV host Jim Cramer manages a charitable trust which discloses its positions, theoretically allowing investors to narrow down the massive volume of views that Cramer distributes into a manageable number of confidence picks. One recent addition to the trust’s portfolio is Eaton Corporation (NYSE:ETN), a $16 billion market cap electrical equipment company.
John Levin’s Levin Capital Strategies had the largest hedge fund position in Eaton Corporation at the end of the second quarter according to our database of 13F filings; the fund owned 2.4 million shares, a moderate increase from its position at the beginning of April (find more of Levin's stock holdings). Renaissance Technologies, founded by Jim Simons, also increased its stake and had 2.2 million shares in its portfolio at the end of June (research other stocks Renaissance Technologies liked). Bain Capital’s Brookside Capital also liked the stock during the second quarter, initiating a position of 1.7 million shares during that time (see more stock picks from Brookside Capital).
The second quarter of 2012 saw lower revenue for the company than the second quarter of 2011, but successful cost cutting brought net income up 14% and earnings per share up by a similar amount. In addition, much of the decline in revenue was driven by changes in foreign exchange rates. If these rates stabilize, then they will no longer affect Eaton’s financials; if foreign currencies rebound against the dollar, than that will augment the company’s operations going forward. In its quarterly report, Eaton Corporation updated its 2012 forecast to an earnings range centered on $4.24 per share. The current share price is between $47 and $47.50, so this equates to a current-year P/E of about 11; this figure also happens to be the trailing earnings multiple. Given analyst consensus that the company will grow its earnings in 2013, the forward P/E is 10. Considering the fairly low multiple, decent business performance, and a 3.2% dividend yield we can see why Cramer likes this stock: it is not in a flashy industry and does not get a lot of media attention, but appears to be a good value.
Some industrial equipment companies that make good peers for Eaton are ITT Corp (NYSE:ITT), Johnson Controls, Inc. (NYSE:JCI), Parker-Hannifin Corporation (NYSE:PH), and Emerson Electric Co. (NYSE:EMR). Most of these companies trade at 10 to 11 times forward earnings estimates, like Eaton, with Emerson being a very slight outlier at a P/E of 13. All four peers, unlike Eaton, got at least a small boost to their revenues in their most recent quarter compared to the same period in the previous year, with all except ITT turning it into a moderate increase in earnings as well. However, Eaton got the largest earnings growth despite the (forex-driven) decline in revenue we’ve discussed. On the dividend front, Eaton’s yield is essentially the same as Emerson’s (3.3%) and trumps that of the rest of the company’s peers. The difference isn’t large, but is worth at least some consideration. With Johnson and Parker-Hannifin even with Eaton on a trailing earnings basis as well, and Emerson trading at a slight premium by that valuation metric, the higher dividend yield is particularly positive. It should be noted that Emerson does have about twice Eaton’s market capitalization.
Eaton and its peers are priced at about the same level relative to their earnings. Yet Eaton has been getting the best earnings growth of the lot recently, and that is even after a negative impact on revenue from foreign exchange (it’s possible, of course, that currency factors are also affecting peers, but Eaton is particularly notable for turning the lowest revenue growth into the highest income growth). Coupled with a good dividend yield, it might be a good company to investigate further.