This ETN Stock Forecast article was written by Meiru Zhong – Financial Analyst at I Know First.

Highlights

• Eaton achieved a first-quarter record with sales of $5.9 billion, up 8% over the same period in 2023. Operating margin was 23.1%, a year-over-year increase of 340 basis points. 
• In Q1’2024, Eaton announced 42 megaprojects totaling over $130 billion. Growth in megaprojects in North America supports Eaton’s strategic development.
• By the end of 2023, Eaton had a quite high rate of percentage of accounts receivable to revenue, reaching 19%. Its free cash flow rose back to the pre-pandemic level, arriving at 2.87 billion, up 48% from 2022.
• Projects under $1 billion in the nonresidential construction market also grew by 10% through the first quarter of 2024. This segment is projected to exceed $500 billion in 2024, taking up 50% of the U.S. market.
• Focus on sustainability drives the increase in global infrastructure spending on clean energy programs. It will drive the industrial end market to grow by about 7% from 2023 to 2026.

Overview

Eaton Corporation plc (ETN, Eaton, or the company) is an Irish/American multinational power management company. It provides a full suite of project management services, including design, specifying, commissioning, training, remote monitoring, and aftermarket service. Founded in 1911 by Joseph Oriel Eaton II and Viggo Torbensen, the company currently operates in five segments, Electrical Americas, Electrical Global, Aerospace, Vehicle, and eMobility. As of the end of 2023, Eaton earned a revenue of US$23.2 billion and spent US$754 million on R&D, with an operating margin of 31%.

First Quarter Record Starts the Year 2024

Eaton Corporation plc sells products and services in five markets: Electrical Americas, Electrical Global, Aerospace, Vehicle, and eMobility. By the end of 2023, in terms of revenue contribution, the business lines of Electrical Americas dominated and took up 44% of the total sales, followed by Electrical Global (26%), Aerospace (15%), Vehicle (13%), and eMobility(3%). 

In the first quarter of 2024, Eaton achieved a first-quarter record with sales of $5.9 billion, up 8% over the same period in 2023. The sales growth was fueled by increasing sales internally and sustainably. The operating margin was 23.1%, a year-over-year increase of 340 basis points. operating cash flow was $475 million and free cash flow was $292 million, up 42% and 40% respectively from the first quarter of 2023. 

Specifically, the Electrical Americas segment reported sales of $2.7 billion, up 17% from the first quarter of 2023. Operating profits were $785 million up 50% and operating margins were 29.2%, up 6.3% over the same period of 2023. The surge in revenue was driven by growing demand, especially in the data center market, where orders increased by 8% over the past year. By the end of the first quarter, the backlog had grown by 31% compared to the previous year. The book-to-bill ratio stood at 1.2, indicating strong demand as orders exceeded completed ones by 20%.

In the Electrical Global segment, sales stayed steady at $1.5 billion, matching the first quarter of 2023, the same as operating profits and operating margins, reaching $274 million and 18.3% respectively. Orders increased by 4%, mainly due to higher demand in the data center and utility markets. The backlog grew by 12% compared to last year. The book-to-bill ratio stayed strong at 1.1 over the past year, showing consistent demand with orders slightly exceeding completed ones.

The aerospace segment saw sales rise to $871 million, a 9% increase from the first quarter of 2023. Operating profits reached $201 million, up by 12%, with operating margins at 23.1%, up 60 basis points. Orders in the first quarter were up 2% with particular strength in commercial OEM, commercial aftermarket, and defense aftermarket. Backlog was $3.4 billion up 11% over March 2023 and the Book-to-bill ratio remained strong at 1.1.

The Vehicle segment posted sales of $724 million, down 2% from Q1 2023. Operating profits were $116 million, up 8% and Operating margins were 16.0%, up 150 basis points over the first quarter of 2023. Eaton showed strong operational performance producing higher profits on lower sales.

Sales for the eMobility segment were $158 million, up 7% over the first quarter of 2023. The segment reported an operating loss of $4 million, because of the launch and ramp-up of new and key programs to support the future robust demand for electric vehicles.

In conclusion, Eaton had performed well in its diverse segments and the growth rate of operating profit on each business maintained two-digit, except for the vehicle market at 8% with lower sales. The strong financial performance supported its adjusted earnings per share (EPS) at $2.40, up 28% from Q1 2023.

Strong Contributors Drive Eaton’s Future Volume Growth

Since Jan.2021, Eaton had about $1.2 trillion in cumulative North American mega projects. In Q1’2024, Eaton announced 42 megaprojects totaling over $130 billion thanks to reindustrialization supported by the government. 54% of projects are related to federal government incentives, such as IRA, IIJA, and CHIPS. Only 16% of these projects have started construction, which means the rest of 84% of projects will be completed in the next multi-year. These megaprojects represented 15% of total nonresidential construction starts in 2023.  For megaprojects, Eaton had a win rate of about 40%, indicating that the percentage of won contracts was 40% of the total number of deals pursued. The cancellation rates continue to be robust, around 10% and below historical rates.

A megaproject is a project with an announced value of $1 billion or more, and the number is now 415 projects in North America, with a similar trend in Europe. As large-scale and complex ventures, the company will expect to recognize the revenue of these projects over the next several years. According to the fourth quarter of 2023, it might take Eaton 1-3.5 years from announcement to negotiation and then another 3.3-4 years for products to be shipped. The long project lifecycle provides a more predictable revenue stream in the next few years and also helps companies build strong bonds with customers and form long-term relationships with stakeholders. However, it might incur cash flow challenges and bad debts, which will bring huge financial risks. 

Based on its past five years’ annual report, Eaton’s percentage of accounts receivable to revenue increased from 16% in 2019 to 20% in 2022 and the number dropped by 1 %, arriving at 19% in 2023. This figure was quite high as the company has delivered products or services based on contracts, and almost one-fifth money has not been paid for by customers. In terms of free cash flow, although the number had plummeted during the pandemic, it almost rose back to the 2019 level, reaching 2.87 billion in 2023, up 48% from the previous year. The increase demonstrates Eaton’s resilience and effective management strategies and also presents the company’s ability to capitalize on opportunities. 

Apart from the megaprojects, projects under $1 billion in the nonresidential construction market also grew by 10% through the first quarter of 2024 and accounted for about 85% of the total market since 2023. This segment is projected to exceed $500 billion in 2024, taking up 50% of the U.S. market, up about 56% since 2021. Until now, megatrends have contributed to strong end-market growth in power and renewables, water and wastewater, manufacturing, and data centers. Particularly, the data center end market has continued to gain steam, and expectations for CAGR from 2022 to 2025 have been reset from 16% to 25% based on the prior view of Q3’2023. The win rate was 35%, indicating that won contracts accounted for approximately 35% of the total deals pursued. 

What’s more, the focus on sustainability also drives the increase in global infrastructure spending on clean energy programs, which help expand the end markets and support companies’ sustainable development. For example, industrial markets are undergoing growing pressure to decarbonize to lower costs and develop more sustainable operations, which will drive the industrial end market to grow by about 7% from 2023 to 2026.

DCF Estimates $334 ETN Stock Forecast

The DCF analysis shows that ETN’s intrinsic, 1-year, and 2-year stock price should be around $334, $372, and $394 respectively, which is 4%, 16%, and 23% upside potential from the price of $320.50 on May 3, 2024. It’s clear that the ETN stock price is undervalued and is worth buying.

The DCF model is built based on the following assumptions:

• The risk-free rate is 4.7% according to the US 10-year zero coupon bond in May of 2024. The risk premium of 5.5% comes from the average market risk premium in the U.S. from Statista.
• Beta 1.08 is calculated based on the slope of the change of monthly ETN stock price and S&P500 price from 2018 to 2024.
• The cost of debt is calculated as a weighted average interest expense of 3.2%.
• The tax rate is the effective tax rate of 15.8% derived from the 10-K 2023.
• The terminal growth rate is assumed at 4%.

Due to the uncertainties in the macroeconomic environment, it is difficult to accurately predict the impact of relevant risk factors such as epidemics and wars, and the assumption may not be valid. A sensitivity matrix is created to show the impacts on ETN’s intrinsic stock price by altering WACC (weighted average cost of capital) and terminal growth rate.

Conclusion

I have taken a buy-side position on ETN stock because the discounted cash flow (DCF) target price indicates a potential upside of 4% from the current price, with a target price of $334. Eaton achieved a first-quarter record with sales up by 8% and operating margin up by 3.4%. The organic growth was primarily fueled by megatrends, such as reindustrialization, energy transition, digitalization, and electrification, which are expected to continue in the future. In the long run, I am confident that the increasing demand anticipated in end markets will drive sustainable growth, leading to a higher stock price for Eaton in the coming years.

It is worth paying attention that the stock-picking AI of I Know First has a high signal on the one-year market trend forecasts, supporting my position for the ETN stock forecast. The light green for the short-term forecasts is mildly bullish, while the darker green is a strong bullish signal for the one-year forecast.

Past Success with ETN Stock Forecast

I Know First has been bullish on the ETN stock forecast in the past. On February 7^th, 2024 the I Know First algorithm issued a forecast for ETN stock price and recommended ETN as one of the best mega cap stocks to buy. The AI-driven ETN stock prediction was successful on a 3-month time horizon resulting in more than 20.77%.

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Please note-for trading decisions use the most recent forecast.