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Eaton Eats It - Eaton Corporation

January 30, 2010 | About:
Wax

Wax

Author's Website
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We noticed a news report last month that mentioned Warren Buffett's Berkshire Hathaway, Inc. (BRK-A) had sold its 2 million share stake in Eaton Corporation, (ETN), a move that admittedly struck us as odd since every website that can spell Warren Buffett says he holds stocks for perpetuity.

Curious about the company that Warren Buffett dumped, we poked around.

Basis

Financial information contained in this report, is based on the company's most recent Form 10-K filing for fiscal year ending December 31, 2008, as filed with the Securities and Exchange Commission on February 27, 2009.

What They Do

Eaton Corporation is a diversified power management company and a global technology leader in electrical components and systems for power quality, distribution and control; hydraulics components, systems and services for industrial and mobile equipment; aerospace fuel, hydraulics and pneumatic systems for commercial and military use; and truck and automotive drivetrain and powertrain systems for performance, fuel economy and safety. The company sells products to customers in more than 150 countries.

Short-Term Investment

With first resistance at $64.02, a recent close of $63.62, and first support at $52.60, we simply don't see any reason to put almost $64+ at risk for a potential gain of 1%, especially when the downside is almost 20%.

Long-Term Investment

There is no simple way for us to say this, we think the company's balance sheet sux.

More than 46% of total assets are goodwill and intangibles, total debt is more than 1.6 times net fixed assets and more than 8 times cash.

In addition, management allowed the company to increase its total debt by more that $650 million something that in our opinion was not necessary had the board of directors grown some stones and eliminated the $320 million the company spent paying dividends.

We would also point out that had management not wasted another $100 million of company funds buying back company shares, the company's cash balance would have increased from $1.14 per share to a much more reasonable $3.68 per share.

But management didn't do any of those things.

Instead, it appears to us, that management inserted it's collective head in it's collective rear end and then prayed for a collective glass stomach so it could see where it was going.

Is this why Mr. Buffett closed his position in the company? We have no idea, but it's as good a reason as any given the seeming ineptitude of management.

Wax

For the Wax Ink Eaton Corporation Raw Value worksheet, please click here.

About the author:

Wax
Wax Ink is a baseline equity research company not licensed or registered with any government agency

Visit Wax's Website


Rating: 3.9/5 (7 votes)

Comments

dealraker
Dealraker - 4 years ago
"Every website says WB holds stocks for perpetuity."

Where in the hell does this come from? Huh?

augustabound
Augustabound - 4 years ago


"Every website says WB holds stocks for perpetuity."

Where in the hell does this come from? Huh?



I think the quote people remember most is something like, "Our favourite holding period is forever." Of course most forget that WEB isn't the only one buying and selling under the Berkshire name.

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