Should You Consider Eaton at These Prices?

With shares of Eaton (NYSE:ETN) trading around $68, is the stock 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. It provides electrical products, systems, and services for power quality, distribution, and control; 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. The company operates through Electrical Americas, Electrical Rest of World, Cooper, Hydraulics, Aerospace, Truck, and Automotive segments. Its products are used in a wide range of growing industries worldwide that will fuel demand for the company. Look for Eaton to continue to profit as international companies and consumers grow at impressive rates.

T = Technicals on the Stock Chart are Strong

Eaton stock has seen a powerful move higher over the last few years. In fact, the stock is now trading at all-time high prices and sees no significant signs of slowing just yet. 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 above its rising key averages, which signals neutral to bullish 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.

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Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Eaton Options

24.01%

30%

29%

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

Put IV Skew

Call IV Skew

June Options

Flat

Average

July Options

Flat

Average

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

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-13.19%

-56.53%

-4.67%

15.46%

Revenue Growth (Y-O-Y)

34.09%

7.44%

-4.20%

-0.54%

Earnings Reaction

2.77%

4.93%

5.01%

3.88%

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

P = Excellent 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 the sector?

Eaton

ITT

Johnson Controls

Parker Hannifin

Sector

Year-to-Date Return

26.75%

30.31%

24.10%

15.57%

19.34%

Eaton has been a relative performance leader, year-to-date.

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Conclusion

Eaton provides essential power management products and services to a wide variety of companies and industries around the world. The stock has seen a powerful run in recent years that has taken it to all-time high prices. Over the last four quarters, the company has seen mixed earnings and revenue numbers, regardless, investors have remained upbeat. Relative to its peers and sector, Eaton has been a year-to-date performance leader. Look for Eaton to continue to OUTPERFORM.

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