Eaton (ETN) Intrinsic Value: DCF (FCF Based)

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For the Specialty Industrial Machinery subindustry, Eaton's Price-to-DCF (FCF Based), along with its competitors' market caps and Price-to-DCF (FCF Based) data, can be viewed below:

* Competitive companies are chosen from companies within the same industry, with headquarter located in same country, with closest market capitalization; x-axis shows the market cap, and y-axis shows the term value; the bigger the dot, the larger the market cap. Note that "N/A" values will not show up in the chart.

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For the Industrial Products industry and Industrials sector, Eaton's Price-to-DCF (FCF Based) distribution charts can be found below:

* The bar in red indicates where Eaton's Price-to-DCF (FCF Based) falls into.

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Eaton Intrinsic Value: DCF (FCF Based) Calculation

This is the intrinsic value calculated from the Discounted Cash Flow model with default parameters. In a discounted cash flow model, the future cash flow is estimated based on a cash flow growth rate and a discount rate. The cash flow of the future is discounted to its current value at the discount rate. All of the discounted future cash flow is added together to get the current intrinsic value of the company.

Usually a two-stage model is used when calculating a stock's intrinsic value using a discounted cash flow model. The first stage is called the growth stage; the second is called the terminal stage. In the growth stage the company grows at a faster rate. Because it cannot grow at that rate forever, a lower rate is used for the terminal stage.

GuruFocus DCF calculator is a two-stage model. The default values are defined as:

1. Discount Rate: d = 9%
A reasonable discount rate assumption should be at least the long term average return of the stock market, which can be estimated from risk free rate plus risk premium of stock market. GuruFocus uses 10-Year Treasury Constant Maturity Rate as the risk-free rate and rounded up to the nearest integer. It is updated daily. The current risk-free rate is 2.78%. Please go to Economic Indicators page for more information. Please note that we use the 10-Year Treasury Constant Maturity Rate of the country/region where the company is headquartered. If the data for that country/region is not available, then we will use the 10-Year Treasury Constant Maturity Rate of the United States as default. Then we added a risk premium of 6% to get the estimated discount rate. Some investors use their expected rate of return, which is also reasonable. A typical discount rate can be anywhere between 6% - 20%.

2. Growth Rate in the growth stage: g1 = 6.50%
The Growth Rate in the growth stage is initially set as the default 10-Year FCF Growth Rate (Per Share). In cases where the 10-year growth rate is unavailable, it defaults to using the 5-Year FCF Growth Rate (Per Share). If both the 10-year and 5-year growth rates are unavailable, the system defaults to the 3-Year FCF Growth Rate (Per Share).
However, it's important to note that there is a growth rate range. If the calculated growth rate exceeds 20%, it will be capped at 20%. Conversely, if the calculated growth rate falls below 5%, it will be adjusted to 5% to maintain a reasonable range.
=> Eaton's average Free Cash Flow Growth Rate in the past 10 years was 6.50%, which is between 5% and 20%. => GuruFocus defaults => Growth Rate: 6.50%

3. Years of Growth Stage: y1 = 10

4. Terminal Growth Rate: g2 = 4%

5. Years of Terminal Growth: y2 = 10

6. Free Cash Flow per Share: fcf = $7.143.
However, GuruFocus DCF calculator is actually a Discounted Earnings calculator, the EPS without NRI is used as the default. The reason we are doing this is we found that historically stock prices are more correlated with earnings than free cash flow.

All of the default settings can be changed and the results are calculated automatically.

Eaton's Intrinsic Value: DCF (FCF Based) for today is calculated as

set x = (1+g1)/(1+d) = (1+0.065)/(1+0.09) = 0.97706422018349
and y = (1+g2)/(1+d) = (1+0.04)/(1+0.09) = 0.95412844036697

* For Operating Data section: All numbers are indicated by the unit behind each term and all currency related amount are in USD.
* For other sections: All numbers are in millions except for per share data, ratio, and percentage. All currency related amount are indicated in the company's associated stock exchange currency.

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Eaton  (NYSE:ETN) Intrinsic Value: DCF (FCF Based) Explanation

Unlike valuation methods such as Net Current Asset Value, Tangible Book per Share, Graham Number, Median PS Value etc, discounted Cash Flow model evaluates the companies based on their future earnings power instead of their assets.

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Be Aware

What you need to know about the DCF model:

1. The DCF model evaluates a company based on its future earnings power
2. Growth is taken into account; therefore a faster growth company is worth more if everything else is the same.
3. Since we are projecting future growth, it is assumed that the company will grow at the same rate as it did during the past 10 years. Therefore this model works better for the companies that have relatively consistent performance.
4. The DCF model works poorly for inconsistent performers such as cyclicals.
5. What discount rate should you use? Your expected return from the investment is a good discount rate assumption.
6. A larger margin of safety should be required for companies with less predictable businesses.

You can screen for stocks that trade below their Intrinsic Value: DCF (FCF Based) and Intrinsic Value: DCF (Earnings Based) with the GuruFocus All-in-One Screener. Companies with a high Predictability Rank that trade at a discount to their Intrinsic Value: DCF (FCF Based) and Intrinsic Value: DCF (Earnings Based) can be found in the screen of Undervalued Predictable Companies.

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Eaton Intrinsic Value: DCF (FCF Based) Related Terms

Thank you for viewing the detailed overview of Eaton's Intrinsic Value: DCF (FCF Based) provided by GuruFocus.com. Please click on the following links to see related term pages.

Predictability Rank Intrinsic Value: DCF (Earnings Based) Intrinsic Value: DCF (Dividends Based) Intrinsic Value: Projected FCF Free Cash Flow Free Cash Flow per Share Margin of Safety % (DCF FCF Based) Margin of Safety % (DCF Earnings Based) Margin of Safety % (DCF Dividends Based)

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Eaton (ETN) Business Description

Executives

Sternadt Paulo Ruiz	officer: See remarks below	1000 EATON BLVD., CLEVELAND OH 44122
Thomas B Okray	officer: See Remarks below.	5008 AIRPORT ROAD NW, ROANOKE VA 24012
Szmagala Taras G. Jr.	officer: See remarks below	C/O EATON CORPORATION PLC, 1000 EATON BOULEVARD, CLEVELAND OH 44122
Craig Arnold	director, officer: See Remarks below.	EATON CENTER, 1111 SUPERIOR AVENUE, CLEVELAND OH 44114
Peter Denk	officer: See remarks below	C/O EATON CORPORATION PLC, 1000 EATON BLVD., CLEVELAND OH 44122
Heath B. Monesmith	officer: See Remarks below.	600 TRAVIS, SUITE 5600, HOUSTON TX 77002
Nandakumar Cheruvatath	officer: See Remarks below	1000EATON BLVD., CLEVELAND OH 44122
Michael Yelton	officer: See remarks below	C/O EATON CORPORATION PLC, 1000 EATON BLVD., CLEVELAND OH 44122
Joao V Faria	officer: See Remarks below.	1000 EATON BLVD., CLEVELAND OH 44122
Brian S Brickhouse	officer: See Remarks below.	1000 EATON BLVD., CLEVELAND OH 44122
Daniel Roy Hopgood	officer: See Remarks below.	2135 WEST MAPLE ROAD, TROY MI 48084-7186
Deborah L Mccoy	director	CONTINENTAL AIRLINES INC., 1600 SMITH ST. HQS FL, HOUSTON TX 77002
Boise April Miller	officer: See Remarks below.	C/O INTEL CORPORATION, 2200 MISSION COLLEGE BLVD, SANTA CLARA CA 95054
Christopher M Connor	director	THE SHERWIN WILLIAMS CO, 101 W. PROSPECT AVENUE, CLEVELAND OH 44115-1027
Dorothy C Thompson	director	1000 EATON BLVD., CLEVELAND OH 44122