Should You Buy Eaton While It's Below $340?

Over the past year, Eaton's (NYSE: ETN) stock price has fallen about 2%. Basically, it has gone nowhere, but in an exciting manner. At one point over this span, the shares fell roughly 30%, putting Eaton into its own personal bear market. After a recovery and push to new highs, it fell again, this time just shy of 20%.

The industrial giant's stock is bouncing higher again and is now down just 15% from its 52-week high. Should you buy the stock as it starts to rebound?

What does Eaton do?

Eaton is a globally diversified industrial company. Its core business is making products that help to control the flow of power. About 50% of revenue comes from the company's North American electrical division. Another 25% of the top line comes from its international electrical business.

Very clearly, this company is focused on electricity. The rest of the income statement's top line comes from aviation and automobiles, including a small but growing division dedicated to electric vehicles.

Image source: Getty Images.

This isn't what Eaton has always looked like, which is important to understand. While it has long focused on managing the flow of power, it has existed for more than 100 years. Originally, it made transmissions for trucks. It has also owned hydraulics businesses, though they were recently sold. The company exists as it does today because Eaton has a long history of adapting its business to meet its customers' current demands.

The shift toward electricity aligns with broader global economic trends. Notably, electricity demand in the United States is expected to increase by 55% between 2025 and 2040. That is up from just 9% growth between 2000 and 2020. That is a step change in the rate of growth for utilities, in what has long been considered a boring business. This industrial giant appears well-positioned for the future.

From a business perspective, Eaton is a very attractive company. However, as Benjamin Graham, the man who helped train Warren Buffett, once said, even a good company can be a bad investment if you pay too much for it.

Eaton: Price versus value

After the recent drawdown, is Eaton worth buying? Eaton's price-to-sales ratio is 4.9, which is above its 3.8 five-year average for this valuation metric. The stock's price-to-earnings ratio is 33, compared to a long-term average of 32. And the price-to-book value ratio is 6.9, versus a five-year average of 4.7. The stock's dividend yield is currently around 1.2%, which is toward the lower end of its historical yield range.

Valuation is more art than science, but taken as a whole, Eaton still looks a bit expensive relative to its own history. That holds true when you compare the stock to the S&P 500 as well. While the broader index's yield is slightly lower at 1.1%, its P/E ratio and P/B ratios are also lower at 28 and 5.2, respectively. The average industrial stock, using Vanguard Industrials Index ETF as a proxy, has a dividend yield of 1%, a P/E ratio of nearly 27, and a P/B ratio of 5.2.

Eaton is a good company, but it's not cheap enough

Eaton is a very well-run business that has proven that it knows how to adapt and change over time. If you have owned the stock for a long time, you may want to hold it. However, its portfolio of businesses is well-positioned today. Wall Street knows it and is affording Eaton a premium price. Most investors who are looking to buy it today will likely be better off keeping this industrial giant on their wish lists for now.

Reuben Gregg Brewer has positions in Eaton Plc. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.