Why Does Jim Cramer Like Eaton?

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.

Jim Cramer

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.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!