Let Eaton's Growth Power Your Porftolio

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Eaton Corporation ) is a diversified power management company providing energy-efficient solutions in the areas of electrical, hydraulic and mechanical power.  Eaton recently celebrated its 100th anniversary, but investors would be making a mistake in assuming this is an old company that’s slowing down.  Eaton’s recently announced acquisition of Cooper Industries will both optimize its position in the near term as well as ensure future growth.  The company’s new course of action, combined with its already solid financial performance, makes this stock worthy of further consideration for investment.

Eaton competes with fellow industrial companies Honeywell (NYSE: HON) and Emerson Electric ).  Honeywell got off to a decent start to 2012, with revenues during the first nine months of the year up more than 3.5% versus the prior year.  Moreover, net income attributable to shareholders increased 13% year over year, which allowed Honeywell to increase its 2012 dividend by more than 11 percent versus 2011's payout.

Emerson has an impressive historical track record of raising its dividend for 55 consecutive years, and has performed well over the last several years.  Five-year compound annual growth rates of Emerson's sales, net earnings per share, and dividends per share stand at 5%, 8%, and 9% respectively.

Both Emerson and Honeywell are well-run, successful businesses.  However, these two companies both trade for more than 20 times trailing twelve month earnings.  Eaton is much more attractively valued when compared to these peers. Eaton trades at only a 13.5 trailing P/E ratio and a forward P/E of 12.   

Eaton's recent performance in review

In the company’s 2011 annual report, Eaton justifiably boasted about its record sales and earnings, which rose 17 percent and 19 percent respectively.  Eaton is a fantastic cash flow generator, and uses that cash to reward shareholders.  The company raised its dividend 17 percent in 2011.  Eaton has now come through with dividend increases three years in a row.  Since 2000, Eaton stock has delivered a 12.1 percent compounded annual total shareholder return.  As far as its financial position is concerned, the company is conservatively capitalized.  Eaton’s balance sheet shows a very healthy current ratio of 1.6, meaning the company has a superb ability to fund its short term obligations.  The long-term solvency of the company is sound as well, with Eaton’s long-term debt-to-equity ratio at just 45 percent.

One of the most promising aspects of Eaton’s business is its international exposure.  In 2011, the company generated 55 percent of its sales from outside the United States.  The company has specifically targeted the emerging markets for growth: sales in emerging nations grew to 27 percent of consolidated sales in 2011. 

Eaton is also diversified throughout the economic cycle.  The company’s six business segments are divided into early-cycle, mid-cycle, and late-cycle segments.  As a testament to Eaton’s operational efficiency, the company experienced growth in each segment in 2011 and expects the same for fiscal year 2012.  

Future growth through acquisition

To expand on international growth even further, Eaton announced the largest acquisition in its history last year:  the purchase of Cooper Industries.  The $13 billion acquisition makes Eaton a global leader in power management.  The merger expands the company’s market segment reach and broadens its portfolio of products. Combining the results of Eaton and Cooper for the four quarters ending September 30, 2012, Eaton Corporation had pro forma revenues of $21.8 billion and earnings before interest, taxes, depreciation, and amortization (EBITDA) of $3.3 billion.  The combined entity will employ approximately 100,000 people and sell products to customers in more than 150 countries.

The bottom line

After a bumpy ride in 2012 that saw the company’s share fall as low as $37 before recovering to its current level of $55, Eaton’s stock is reasonably priced considering the company’s growth outlook.  Investors looking for a combination of growth and dividends should be pleased with Eaton’s near-3 percent dividend yield and future growth opportunities.   

Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Emerson Electric Co.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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