Eaton’s ROE Exceeds Industry at 21.45X: Time to Buy the Stock?

Eaton Corporation’s ETN trailing 12-month return on equity of 21.45% is better than the industry average of 10%. Return on equity, a profitability measure, reflects how effectively a company utilizes its shareholders’ funds to generate income.

Organic growth and continued investment in research and development of new products are assisting the company in providing efficient power management solutions to its clients. Expansion of existing assets and strategic acquisitions are further expanding its market reach.

Eaton has a diversified product portfolio offering, which provides energy-efficient solutions to its broad customer base, ETN’s ongoing investments to upgrade the products and create new products allow the company to expand its operation and widen its revenue base.

 

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Courtesy of its stable performance, Eaton’s shares have gained 80.1% in the last year, outperforming its industry, sector and Zacks S&P 500 Composite’s return in the same time frame.

 

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The chart below indicates that ETN shares are trading above the 50-day and 200-day simple moving average, indicating a bullish trend.

 

Image Source: Zacks Investment Research

 

Eaton has laid out a 10-year plan that includes a $3 billion investment in research and development (R&D) programs, which will allow the company to create sustainable products. Eaton’s approach to R&D is focused on leveraging technology to design solutions that meet the needs of its customers today and into the future. New advance product development and upgrade of existing products allow ETN to keep a strong position in different markets and countries across the globe it supplies its products.

Eaton’s products are supplied to around 175 countries, and most importantly, this, in a sense, provides stability to the revenue generation ability of the company, as the loss of a customer will not have any significant impact on revenues and margins. Its diversified product portfolio offering energy-efficient solutions will help to serve a broad customer base.Ongoing improvement in the end market conditions is boosting orders and revenues.

Reindustrialization and megatrends worldwide create fresh demand for Eaton’s efficient power management products.  Eaton continues to receive orders from its customers across the globe and continues to register an increase in backlog. Eaton’s backlog increased 27% in Electrical and 14% in Aerospace on a rolling 12-month basis.

The new AI training data centers, which require both high power and density, are creating a new opportunity for growth for this power management company. Eaton is strengthening its participation across the entire electrical power value chain and benefiting from momentum in data center and utility end markets, as well as a growth cycle in the commercial aerospace and defense markets.

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