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Wondering if Eaton at around $323 a share is still a smart buy or if the big gains are already behind it? This article is going to unpack what the current price really implies about its value.
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The stock has dipped slightly in the short term, with returns of 2.5% over the last week but -2.0% over the last month and -2.5% year to date. It is still up 116.9% over 3 years and 195.2% over 5 years, which naturally raises questions about how much upside is left from here.
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Recent headlines have focused on Eaton as a company that may benefit from long term trends in electrification and grid modernization, from data center build outs to infrastructure upgrades. Analysts and commentators have been highlighting how these structural themes may relate to the stock’s multi year run, even as investors debate how much of that growth is already priced in.
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On our framework, Eaton scores a 3/6 valuation check, suggesting it appears undervalued on some metrics but not across the board. Next, we will walk through the main valuation approaches and then, at the end of the article, look at a way to bring them all together.
Find out why Eaton’s -4.0% return over the last year is lagging behind its peers.
A Discounted Cash Flow model estimates what a business is worth by projecting the cash it can generate in the future and then discounting those cash flows back to today in $ terms. For Eaton, the latest twelve month free cash flow is about $3.27 billion, and analysts expect this to rise into the mid to high $4 to $5 billion range over the coming years. Simply Wall St extends analyst estimates with its own assumptions, producing a 10 year path that peaks around $6.25 billion in 2028 before moderating slightly toward roughly $4.9 billion by 2035.
When all those future cash flows are discounted back to today using a 2 Stage Free Cash Flow to Equity model, the estimated intrinsic value comes out at about $155 per share. Against a current share price around $323, the DCF implies the stock is roughly 108.3% overvalued on this framework. In other words, the market is paying far more than this cash flow based model suggests is reasonable.
Result: OVERVALUED
Our Discounted Cash Flow (DCF) analysis suggests Eaton may be overvalued by 108.3%. Discover 904 undervalued stocks or create your own screener to find better value opportunities.
For a profitable, established business like Eaton, the price to earnings, or PE, ratio is a practical way to gauge valuation because it links what investors pay today to the profits the company is actually generating. In general, faster growth and lower risk justify a higher PE, while slower growth or higher uncertainty tend to pull a fair PE lower.
Eaton currently trades on a PE of about 32x, which is a premium to the Electrical industry average of roughly 30.2x but a discount to its broader peer group at around 44.9x. Simply Wall St goes a step further by estimating a “Fair Ratio” of about 37.8x, a proprietary view of what Eaton’s PE should be once factors like its earnings growth outlook, margins, industry, size and risk profile are accounted for. This tailored benchmark is more informative than a simple peer or industry comparison because it adjusts for Eaton’s specific fundamentals rather than assuming all companies deserve the same multiple.
With the current 32x PE sitting below the 37.8x Fair Ratio, this approach suggests Eaton’s earnings are being priced somewhat conservatively.
Result: UNDERVALUED
PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1460 companies where insiders are betting big on explosive growth.
Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives, a simple way to connect your view of Eaton’s story with specific forecasts and a clear fair value. A Narrative is your own explanation of how the business will grow, including what you think happens to its revenue, earnings and margins, and then how those expectations translate into what the shares should be worth. On Simply Wall St’s Community page, used by millions of investors, you can choose or build a Narrative for Eaton that ties its data center growth, grid modernization opportunity and risk factors into a numerical forecast and resulting fair value. Narratives then help you decide whether to buy, hold or sell by comparing that Fair Value to the current Price, and they update dynamically as new news, earnings and guidance arrive. For example, one Eaton Narrative with a more optimistic view might lean toward a fair value near 440 dollars, while another with a more cautious view might sit closer to 288 dollars, and you can see exactly which assumptions lead to each conclusion.
Do you think there’s more to the story for Eaton? Head over to our Community to see what others are saying!
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Companies discussed in this article include ETN.
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