Eaton Seems Ready For A Protracted Recovery

With the shares near a 52-week high, it would seem that the Street is not sleeping on Eaton (NYSE:ETN). Although tough times continue in businesses like Hydraulics and Vehicle, most investors seem to believe these businesses are troughing and that more industrially-focused businesses like Electrical Products and Systems can do better in the near term.

I do think Eaton belongs on a watchlist of high-quality diversified industrials, and its relatively greater cyclicality (compared to names like Honeywell (NYSE:HON) or 3M (NYSE:MMM)) could make it a relative outperformer when (if?) that recovery comes. I do have concerns about Eaton's expectations for very modest organic growth in the coming years. My concerns are stemming from the fact that Eaton hasn't always had the greatest success in driving lasting margin improvement.

Right now, I think Eaton is priced for high single-digit to maybe low double-digit returns. That's not bad, though I do think there could be some risk to the underlying free cash flow growth rate assumptions. I'd prefer to buy at a somewhat lower price, but this doesn't look any worse than a hold to me today.

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Eaton Seems Ready For A Protracted Recovery