Eaton Corp PLC (ETN, Financial) has seen a daily gain of 3.45%, and a 3-month gain of 0.77%, with an Earnings Per Share (EPS) of 6.77. The question that arises is whether the stock is modestly overvalued. In this article, we will provide a comprehensive analysis of Eaton PLC's financials and valuation to answer this question. We encourage you to read on for a deeper understanding of the company's value.
Company Introduction
Eaton is a diversified power management company that has been operating for over 100 years. The company's operations span various segments, including electrical Americas, electrical global, aerospace, vehicle, and eMobility. Eaton's portfolio can broadly be divided into two halves. One part of its portfolio is housed under its industrial sector umbrella, which serves a variety of end markets like commercial vehicles, general aviation, and trucks. The other portion is Eaton's electrical sector portfolio, which serves data centers, utilities, and the residential end market, among others. Despite being domiciled in Ireland for favorable tax treatment, most of its operations are in the U.S.
At its current price of $204.6 per share, we compare this to the GF Value of $179.21, which is an estimation of fair value. This comparison will pave the way for a more profound exploration of the company's value.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
The stock of Eaton PLC (ETN, Financial) is believed to be modestly overvalued based on GuruFocus' valuation method. GF Value estimates the stock's fair value based on three key factors: historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. On the other hand, if the share price is significantly below the GF Value calculation, the stock may be undervalued and have higher future returns. At its current price of $ 204.6 per share, Eaton PLC stock is believed to be modestly overvalued.
Because Eaton PLC is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth.
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Financial Strength
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to understand its financial strength. Eaton PLC has a cash-to-debt ratio of 0.14, which ranks worse than 88.48% of 2856 companies in the Industrial Products industry. The overall financial strength of Eaton PLC is 7 out of 10, which indicates that the financial strength of Eaton PLC is fair.
This is the debt and cash of Eaton PLC over the past years: 
Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Eaton PLC has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $22 billion and Earnings Per Share (EPS) of $6.77. Its operating margin is 15.48%, which ranks better than 83.11% of 2901 companies in the Industrial Products industry. Overall, the profitability of Eaton PLC is ranked 7 out of 10, which indicates fair profitability.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Eaton PLC is 0.6%, which ranks worse than 71.43% of 2737 companies in the Industrial Products industry. The 3-year average EBITDA growth rate is 4.6%, which ranks worse than 59.66% of 2427 companies in the Industrial Products industry.
ROIC vs WACC
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Eaton PLC's ROIC is 9.02 while its WACC came in at 8.64.
The historical ROIC vs WACC comparison of Eaton PLC is shown below: 
Conclusion
In conclusion, the stock of Eaton PLC (ETN, Financial) is believed to be modestly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 59.66% of 2427 companies in the Industrial Products industry. To learn more about Eaton PLC stock, you can check out its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
