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Eaton (ETN) Predictability Rank


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What is Eaton Predictability Rank?

3 (5)

Warren Buffett said many times that the companies he likes are:

1. Simple businesses that he understands
2. that have predictable and proven earnings and
3. with economic moat
4. those can be bought at a reasonable price.

It is hard to quantify "simple businesses that he (Buffett) understands", so we will focus on the other three characteristics instead. In GuruFocus Research: What worked in the market from 1998-2008? Part I: Introduction of Predictability Rank, we will show that the businesses that have predictable and proven earnings are usually also simple businesses that an average person could understand.

GuruFocus conducted a back test study of Warren Buffett's strategy of "buying good companies at fair prices" for the years from 1998-2008.


Eaton Predictability Rank Calculation

In our database there are 2403 stocks that have been traded from Jan. 2, 1998 to Aug. 31, 2008. We have the complete 10-year financial data and trading prices of these companies for this period. We rank the predictability of these companies based on the consistency of their revenue per share and EBITDA (earning before interest, tax, depreciation and amortization) per share over the past ten fiscal years, and study the correlation between the stock performances and the predictability of the business.

Our study may be subject to these biases and assumptions:

Dividend yields are not counted for investment returns
Effects of price changes due to spin-offs may not be fully adjusted
Study is subjected to survivorship bias due to de-listing, bankruptcy, LBO, M&A, etc.

The correlation between business predictability and investment returns of a company is showed below.

Correlation Between Business Predictability and Investment Returns

PredictablesNon-PredictableAll stocks
Total Number of stocks57018332403
Total Lost Money61830891
Total Lost More Than 50%18412430
Total Lost More Than 90%48690
Average Gain260.6%100.0%138.1%
Median Gain150.0%13.0%39.0%
Maximum Gain2852.0%11483.0%11483.0%
Maximum Loss-100.0%-100.0%-100.0%
Annualized Average Gain12.7%6.7%8.4%
Annualized Median Gain8.9%1.1%3.1%


















For the 570 predictable companies, we have seen strong correlation between the predictability of businesses and the stock performances over the past 10 years, regardless of the valuation of business at 1998. Accordingly, we have ranked the business predictability from 5-star to 1-star, as shown in this table.

Predictability Rank5-Star4.5-Star4-Star3.5-Star3-Star2.5-Star2-Star1-Star (non-predictable)Average among all
% Out of All 2403 Stocks 3.3% 2.9% 3.7% 3.3% 3.3% 3.7% 3.3% 76.3% 100%
% that are in Loss (10y) 3% 10% 8% 9% 11% 18% 16% 45% 37%
Average Gain (10y) 364.6% 330.9% 278.0% 235.1% 243.5% 227.8% 154.8% 100.0% 138.1%
Median Gain (10y) 238.5% 193.5% 171.0% 159.0% 132.5% 113.5% 87.0% 13.0% 39.0%
Maximum Gainer 2228.0% 2547.0% 2452.0% 2852.0% 2432.0% 1892.0% 1807.0% 11483.0% 11483.0%
Maximum Loser -82.0% -53.0% -67.0% -100.0% -83.0% -100.0% -78.0% -100.0% -100.0%
Annualized Average Gain 15.4% 14.6% 13.2% 12.0% 12.2% 11.7% 9.1% 6.7% 8.4%
Annualized Median Gain 12.1% 10.6% 9.8% 9.3% 8.2% 7.3% 6.0% 1.1% 3.1%
















For detailed information about each predictability rank, please go to GuruFocus Research: What worked in the market from 1998-2008? Part I: Introduction of Predictability Rank

Also read:

Part II: What worked in the market from 1998-2008? Part II: Role of Valuations
Part III: Intrinsic Value, Discounted Cash Flow and Margin of Safety

Eaton Predictability Rank Related Terms

Thank you for viewing the detailed overview of Eaton's Predictability Rank provided by GuruFocus.com. Please click on the following links to see related term pages.


Eaton Business Description

Address
30 Pembroke Road, Eaton House, Dublin, IRL, D04 Y0C2
Founded in 1911 by Joseph Eaton, the eponymous company began by selling truck axles in New Jersey. Eaton has since become an industrial powerhouse largely through acquisitions in various end markets. Eaton's portfolio can broadly be divided into two parts: its electrical and industrial businesses. Its electrical portfolio (representing around 70% of company revenue) sells components within data centers, utilities, and commercial and residential buildings, while its industrial business (30% of revenue) sells components within commercial and passenger vehicles and aircraft. Eaton receives favorable tax treatment as a domiciliary of Ireland, but it generates over half of its revenue within the US.
Executives
Dorothy C Thompson director 1000 EATON BLVD., CLEVELAND OH 44122
Heath B. Monesmith officer: See Remarks below. 600 TRAVIS, SUITE 5600, HOUSTON TX 77002
Craig Arnold director, officer: See Remarks below. EATON CENTER, 1111 SUPERIOR AVENUE, CLEVELAND OH 44114
Marshall Ernest W Jr officer: See Remarks below. 1000 EATON BLVD, CLEVELAND OH 44122
Peter Denk officer: See remarks below C/O EATON CORPORATION PLC, 1000 EATON BLVD., CLEVELAND OH 44122
Michael Yelton officer: See remarks below C/O EATON CORPORATION PLC, 1000 EATON BLVD., CLEVELAND OH 44122
Gregory R Page director EATON CENTER, 1111 SUPERIOR AVENUE, CLEVELAND OH 44114
Szmagala Taras G. Jr. officer: See remarks below C/O EATON CORPORATION PLC, 1000 EATON BOULEVARD, CLEVELAND OH 44122
Olivier Leonetti director 5757 N. GREEN BAY AVENUE, P.O. BOX 591, MILWAUKEE WI 53201
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
Nandakumar Cheruvatath officer: See Remarks below 1000EATON BLVD., CLEVELAND OH 44122
Joao V Faria 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
Brian S Brickhouse officer: See Remarks below. 1000 EATON BLVD., CLEVELAND OH 44122