On Friday, Morgan Stanley initiated coverage of Eaton Corporation (NYSE:ETN) with an Overweight rating and established a price target of $370.00. The investment firm identified Eaton as possessing the strongest and most diverse set of secular drivers within the US Industrials sector, which they believe will support an extended upcycle and position the company for sustained high single-digit organic growth.
Eaton is anticipated to achieve approximately 8% organic growth in 2025-26, which is about 200 basis points above the consensus. This growth is expected to drive mid single-digit earnings per share (EPS) upside and could also lead to an expansion of the company's multiple due to the sustained strength. Morgan Stanley's analysis suggests that the market has not fully recognized the potential for continued high single-digit growth, especially considering Eaton's lower single-digit organic growth from 2014-19.
The firm's outlook for Eaton is based on the expectation of a multi-year period of high single-digit organic growth, with the company seen as the primary beneficiary of a forecasted extended US capital expenditure upcycle and a top stock for US Reshoring efforts. Eaton's diverse touch-points, including facility construction, factory equipment, utility and infrastructure, and data centers, are viewed as key advantages.
Morgan Stanley's confidence in Eaton is also bolstered by the company's robust backlog, which is approximately three times the normalized coverage, and a return to growth in orders—a combination that is not indicative of a sharp deceleration.
As the durability of Eaton's secular drivers becomes more evident, Morgan Stanley anticipates upside to both organic growth and margin forecasts, as well as the potential for further re-rating into the most premium of Industrial comparison groups. Eaton's projected 8% organic growth and low to mid-teens EPS compound annual growth rate (CAGR) are seen as unique within the sector.
In other recent news, Eaton Corporation has seen several significant developments. Wolfe Research has upgraded Eaton's stock from Underperform to Peerperform, following a 15% drop in share price. This upgrade is based on a 4% upward adjustment in Eaton's fiscal year 2024 estimates and an increase in backlog within its Electrical segments. Wolfe Research has also extended its target price framework for Eaton to year-end 2025, suggesting a potential upside of 15%.
In leadership changes, Eaton announced the appointment of Paulo Ruiz as president and chief operating officer, effective from September 2, 2024. Ruiz will succeed the current CEO, Craig Arnold, on June 1, 2025, following Arnold's retirement. Ruiz has been leading Eaton's Industrial Sector since July 2022 and will continue to manage the sector during the transition.
Eaton also reported a strong second quarter of 2024, with a 24% increase in adjusted earnings per share, reaching a record $2.73. This growth was driven by substantial increases in electrical and aerospace orders and backlogs, leading to an upward revision of the full-year guidance.
Despite minor concerns in the European electrical business and aerospace segment, Eaton's outlook remains positive due to anticipated strong demand and a robust backlog.
InvestingPro Insights
Recent data from InvestingPro underscores the financial health and market position of Eaton Corporation (NYSE:ETN). With a robust market capitalization of $113.75 billion and a P/E ratio of 31.14, Eaton is trading at a low PEG ratio of 0.9, suggesting that its earnings growth is not fully priced into its shares. This aligns with Morgan Stanley's view that the market may not have fully recognized Eaton's growth potential. Additionally, the company's revenue growth over the last twelve months was 9.49%, reflecting the strong organic growth that Morgan Stanley anticipates to continue.
Eaton's commitment to shareholder returns is evident, as it has raised its dividend for 14 consecutive years and maintained dividend payments for an impressive 54 years. The company's dividend yield stands at 1.32%, with a recent dividend growth of 9.3%. Investors may find comfort in Eaton's financial prudence, as it operates with a moderate level of debt and its liquid assets exceed short-term obligations, as per InvestingPro Tips.
For investors seeking more in-depth analysis, additional InvestingPro Tips highlight Eaton as a prominent player in the Electrical Equipment industry, with cash flows that can sufficiently cover interest payments. In total, there are 15 additional InvestingPro Tips available, providing further insights into Eaton's financial metrics and market position.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.