Will Eaton See Higher Prices?

With shares of Eaton (NYSE:ETN) trading around $58, is ETN an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Eaton operates as a diversified power management company worldwide. The company operates through Electrical Americas, Electrical Rest of World, Cooper, Hydraulics, Aerospace, Truck, and Automotive segments. It provides electrical products, systems, and services; power transmission, lighting, and wiring products; 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. It serves a wide range of industries across the globe. Through its segments, Eaton is able to provide products to expanding businesses around the world.

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T = Technicals on the Stock Chart are Mixed

Eaton stock has seen a significant run since hitting lows in 2008. The stock is now digesting gains slightly below all-time high prices so it may be getting ready for another run. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Eaton is trading around its rising key averages which signal neutral price action in the near-term.

ETN

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Eaton options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Eaton Options

31%

76%

77%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Steep

Average

June Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion…

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Eaton’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Eaton look like and more importantly, how did the markets like these numbers?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

-56.54%

-4.67%

15.46%

9.64%

Revenue Growth (Y-O-Y)

7.44%

-4.20%

-0.54%

4.13%

Earnings Reaction

4.93%

5.01%

3.88%

-0.08%

Eaton has seen mixed earnings and revenue figures over the last four quarters. From these figures, the markets have been pleased with Eaton’s recent earnings announcements.

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P = Average Relative Performance Versus Peers and Sector

How has Eaton stock done relative to its peers, ITT (NYSE:ITT), Johnson Controls (NYSE:JCI), Parker Hannifin (NYSE:PH), and sector?

Eaton

ITT

Johnson Controls

Parker Hannifin

Sector

Year-to-Date Return

7.96%

14.28%

10.86%

4.28%

8.39%

Eaton has been an average relative performer, year-to-date.

Conclusion

Eaton provides energy and industrial products to a vast amount of companies that participate in a wide array of industries around the world. The stock has performed well in recent years and is trading near all-time high prices, however, it is still consolidating recent gains. Earnings and revenue figures have sent mixed signals, but investors have been satisfied with the earnings reports. Relative to its peers and sector, Eaton has been an average year-to-date performer. WAIT AND SEE what Eaton does during this coming quarterly earnings announcement.

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