Eaton Corp Valuation – July 2016 $ETN

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today - June 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Eaton Corp (ETN) fares in the ModernGraham valuation model.



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Downloadable PDF version of this valuation:

ModernGraham Valuation of ETN – July 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $29,234,140,000 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.40 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 56.91% Pass
6. Moderate PEmg Ratio PEmg < 20 15.88 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.88 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.40 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 3.80 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

ETN value chart July 2016

EPSmg $4.00
MG Growth Estimate 4.24%
MG Value $67.90
Opinion Fairly Valued
MG Grade B
MG Value based on 3% Growth $57.96
MG Value based on 0% Growth $33.98
Market Implied Growth Rate 3.69%
Current Price $63.49
% of Intrinsic Value 93.51%

Eaton Corporation, PLC Ordinary Shares qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the low current ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Fairly Valued after growing its EPSmg (normalized earnings) from $3.12 in 2012 to an estimated $4 for 2016. This level of demonstrated earnings growth supports the market’s implied estimate of 3.69% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price.

Eaton Corporation, PLC Ordinary Shares performs fairly well in the ModernGraham grading system, scoring a B.

Stage 3: Information for Further Research

ETN charts July 2016

Net Current Asset Value (NCAV) -$19.68
Graham Number $55.91
PEmg 15.88
Current Ratio 1.40
PB Ratio 1.88
Current Dividend $2.22
Dividend Yield 3.50%
Number of Consecutive Years of Dividend Growth 7


Useful Links:

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Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2016
Total Current Assets $7,013,000,000
Total Current Liabilities $5,022,000,000
Long-Term Debt $7,572,000,000
Total Assets $31,583,000,000
Intangible Assets $19,535,000,000
Total Liabilities $16,064,000,000
Shares Outstanding (Diluted Average) 459,800,000

Earnings Per Share History

Next Fiscal Year Estimate $4.10
Dec2015 $4.23
Dec2014 $3.76
Dec2013 $3.90
Dec2012 $3.46
Dec2011 $3.93
Dec2010 $2.73
Dec2009 $1.14
Dec2008 $3.26
Dec2007 $3.31
Dec2006 $3.11
Dec2005 $2.62
Dec2004 $2.07
Dec2003 $1.28
Dec2002 $0.98
Dec2001 $0.60
Dec2000 $1.56
Dec1999 $2.09
Dec1998 $1.20
Dec1997 $1.31
Dec1996 $1.13

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $4.00
Dec2015 $3.92
Dec2014 $3.69
Dec2013 $3.45
Dec2012 $3.12
Dec2011 $2.92
Dec2010 $2.51
Dec2009 $2.50
Dec2008 $3.08
Dec2007 $2.82
Dec2006 $2.38
Dec2005 $1.85
Dec2004 $1.41
Dec2003 $1.15
Dec2002 $1.16
Dec2001 $1.28
Dec2000 $1.57

Recommended Reading:

Other ModernGraham posts about the company

30 Companies in the Spotlight This Week – 5/23/15
Eaton Corporation Annual Valuation – 2015 $ETN
40 Companies in the Spotlight This Week – 2/21/15
Eaton Corporation PLC Quarterly Valuation – February 2015 $ETN
30 Companies in the Spotlight This Week – 11/15/14

Other ModernGraham posts about related companies

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Snap-on Inc Valuation – February 2016 $SNA
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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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