A year ago, Barron’s looked into the future and saw that it was electric. That led us to recommend
Eaton
stock, and we see no reason to change our opinion.
There is a reason for higher conviction. Between June 2022 and June 2023, the U.S. passed the Inflation Reduction Act, which included a bevy of incentives for electric vehicles, energy efficiency, and renewable power generation. That, combined with the Infrastructure Investment and Jobs Act and the Chips Act, will pump nearly $2 trillion into the U.S. economy over the next decade-plus, much of it for electrification.
Electrification is the trend, but figuring out how to play can be tricky.
Tesla
(ticker: TSLA), for instance, may be the leader in electric vehicles, but its shares are down 16% over the past 12 months, while the
S&P 500
is up about 1%. Price cuts, rising interest rates and EV competition have taken some of the shine off Elon Musk’s company.
See All the Stocks We’re Bullish—and Bearish—On
Sometimes it’s better to go with less obvious plays, which is one reason Barron’s recommended shares of Eaton (ETN), a Dublin-based manufacturer founded in the U.S., that makes many of the gizmos needed to electrify everything.
A year ago, the backlog in Eaton’s electrical business was a record $6.4 billion. Today, it sits at $8.9 billion, another record. And the business looks to keep booming. “Reindustrialization, infrastructure spending along with secular growth trends of electrification, energy transition, and digitalization have fundamentally changed the growth prospects for our company,” said CEO Craig Arnold on the company’s first-quarter conference call in May.
That better growth outlook is already showing up in numbers. A year ago, Wall Street expected Eaton to earn $8.90 a share in 2024; now analysts expect $9.26. What’s more, Wall Street expects earnings to grow at a 10% average annual rate for the coming three years, a little faster than earnings growth over the prior three years.
To be sure, Eaton isn’t as novel an idea to play electrification as it was in 2022. Shares are up about 30% over the past 12 months and the stock trades for 20 times 2024 earnings estimates. That price/earnings ratio is about 11% higher than Eaton stock’s average over the past few years and above the S&P 500’s 18 times.
Investors shouldn’t worry about the valuation, says Melius Research analyst Scott Davis. who has a Buy rating on Eaton stock. Margins have room to expand, and the company has the ability to make small, targeted acquisitions that would boost growth. In that context, Eaton’s valuation is “undemanding,” says Davis, who has a $208 target on the stock, up about 16% from recent levels. “Eaton is the poster child for electrification.”
Some investors might be wary of Eaton after its big gain, and because it continues to make new highs in recent weeks. But there are different types of new highs, some good, some not so good. It can be a bad idea to buy a stock, for instance, when a stock spikes after being “overbought,” says CappThesis founder Frank Cappelleri, using the market technician’s term for when a stock goes up too far, too fast. But new highs after a break out are “helpful,” Cappelleri says, and that’s the camp Eaton falls into right now.
We can’t help but let Eaton ride.
Write to Al Root at [email protected]
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