Goldman Sachs: Eaton Shares Have Compelling Relative Valuation

Goldman Sachs turned bullish on power management company Eaton Corporation PLC ETN, attributing the stance to three key points.

The Analyst

Analyst Joe Ritchie upgraded shares of Eaton from Neutral to Buy with a 12-month price target of $88, suggesting 16-percent upside. Goldman said it has an average 6-percent upside in its multis coverage universe.

The Thesis

Eaton's organic growth is inflecting, with management indicating solid organic growth across most of the portfolio, Ritchie said in a Tuesday note. (See the analyst's track record here.)

Goldman views Eaton's margins as potentially conservativ, and Ritchie said the company can drive most of its targeted margin improvement through self-help.

Price/cost will run neutral in 2018, and the impact from Section 232 is likely to affect the company materially less than the $50 million hit suggested at Eaton's investor day, as most of the steel imports come from Canada, the analyst said.

Capital deployment could provide upside, with the company's net leverage at less than two times and over $5 billion of free cash flow estimated for 2018 and 2019, Ritchie said. 

"We model $800 million in buybacks each year in 2018E/2019E, consistent with prior years, but we believe that ETN could put an additional $2.2 billion to work without adding leverage."

Goldman named the following as key catalysts for Eaton:

• A calendar first-quarter beat.  
• Higher 2018 guidance.
• Balance sheet deployment.

The Price Action

Eaton shares have gained about 1.8 percent over the past year through Monday.

The stock was rallying 2.67 percent to $77.93 at the time of publication Tuesday. 

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