Primecap Management Company (Trades, Portfolio) was founded in September 1983 in Pasadena, California. It manages Vanguard Primecap Fund, Vanguard Capital Opportunity Fund, and Vanguard Primecap Core Fund.. Primecap was founded by Chairman and Chief Investment Officer Howard B. Schow, Vice Chairman Mitchell J. Milias, and President Theo A. Kololotrones.
Primecap team evaluates securities based on their outlook over a three- to five-year time horizon, with the intention of holding them considerably longer if their fundamentals warrant it. They believe successful investment decisions rest in correctly appraising the relationship between the fundamental value of a company and the market price of its stock. A company may be valuable because of its free cash flow, its assets, or both; however, a company will be a superior investment only if it is purchased at the right price. Primecap only invest their highest conviction ideas.
Last quarter, Primecap increased its stake in Eaton Corporation (ETN, Financial) by buying 201,929 shares. As of March 31, 2015, the firm was holding 2,706,181 shares of the company. The following chart shows Primecap's holding history in the company.
Eaton Corporation is a power management company with 2014 net sales of $22.6 billion. The Company provides energy-efficient solutions that help its customers effectively manage electrical, hydraulic and mechanical power more efficiently, safely and sustainably. Eaton has approximately 102,000 employees in over 60 countries and sells products to customers in more than 175 countries.
On November 30, 2012, Eaton Corporation acquired Cooper Industries for a purchase price totaling $13,192 million, which consisted of cash totaling $6,543 million and Eaton share consideration valued at $6,649 million. Cooper was a diversified global manufacturer of electrical products and systems, with brands including Bussmann electrical and electronic fuses; Crouse-Hinds and CEAG explosion-proof electrical equipment; Halo and Metalux lighting fixtures; and Kyle and McGraw-Edison power systems products. Cooper had annual sales of $5,409 million for 2011.
Eaton has shown good growth over the last few years and its revenues have grown from $16.3 billion in FY2012 to $22.6 billion in FY2014. During the same period its net income has grown from $1.2 billion to $1.8 billion. Much of this growth has been due to acquisition of Cooper Industries in 2012 and the company's share count has also increased from 350 million to 477 million as a result of this acquisition. Hence, its GAAP EPS has grown at a bit slower rate (than its net income) from $3.46 in FY2012 to $3.76 in FY2014. The company is passing on benefit from increased profitability to its shareholders and has increased its dividend by 29% in the last three years. Going forward, analysts are expecting the company's EPS to increase to $4.76 in FY2015 and $5.26 in FY2016.
Eaton's stock was recently upgraded by JP Morgan's analyst from neutral to overweight. Eaton is currently trading at 14.91x FY2015 EPS which is a discount to S&P 500. One of the primary reason for this low valuation is investors concerns surrounding decline in Power end-market. However, JP Morgan analysts believes that continued expansion in other non-residential categories will more than offset decline in Power activity. This will act as a catalyst for Eaton's stock as it derives more than 25% revenues from non-residential end markets.
In addition, there is also good probability of share repurchases and bolt on acquisitions which can help Eaton's stock price. In the report JP Morgan noted:
"When management pays off ~$1B of long-term debt in the near term it could then have close to $3B capacity for either acquisitions or share repurchases (taking net debt/total capital to ~40%). If it acquired $3B of its own shares that would represent close to 10% of its outstanding shares (at its current stock price). Acquisitions of smaller bolt-on electrical product lines would also be welcomed by investors, in our view."
Eaton is trading at 14.91 times FY2015 earnings and 13.54 times FY2016 earnings. It has a dividend yield of 3.30%. Out of 25 analysts covering the company, 15 have buy or strong buy ratings and 10 have hold ratings. I am bullish on the stock given low valuations, recovering non-residential construction end markets and potential catalysts in the form of share buy backs.
