GE Premium Targeted by Eaton CEO After $12.8 Billion Deal
Chief Executive Officer Sandy Cutler said Eaton Corp. (ETN) may win a higher premium from investors beginning to evaluate it as a multi-industry firm, a category that includes General Electric Co. (GE), following the purchase of Cooper Industries Plc. (CBE)
The $12.8 billion acquisition will boost electrical, aerospace and hydraulics businesses to 80 percent of sales, while the truck and auto-parts units, which link Eaton to the capital-goods category, shrink to a fifth, Cutler said in a phone interview. Eaton said it will close the deal this quarter.
Multi-industry companies normally trade at price-earnings multiples of 12 times to 16 times while Eaton as a capital-goods company has historically traded at about 9 times to 10 times per-share earnings, Cutler said.
“You’re starting to see it be monetized in our stock,” he said.
GE, which makes products from jet engines for airplanes to medical-imaging equipment and gas turbines, commanded a 27 percent premium to Eaton on a price-earnings basis as of yesterday and outperformed it all of this year.
Eaton had topped GE in 2009 and 2010 as investors punished the Fairfield, Connecticut-based company’s stock after $32 billion of credit losses at its finance unit following the collapse of Lehman Brothers Holdings Inc. in 2008.
The Cooper acquisition will drive shares higher because it increases Eaton’s market leadership in the electrical industry and lowers its exposure to truck and autos, which are its “traditionally cyclical business,” Jeffrey Hammond, a KeyBanc Capital Markets analyst in Cleveland, Ohio, wrote in a note yesterday.
Hammond has a buy rating on the company “based on our view that the combined business accelerates Eaton’s long-term earnings power and supports a higher valuation multiple over time,” he said in the note.
Other multi-industry companies include United Technologies Corp. (UTX), which makes Pratt & Whitney jet engines along with Otis elevators, and 3M Co. (MMM), which produces goods from Scotch tape to dental braces.
3M’s price-earnings ratio averaged 14.8 in the third quarter, compared with 13.7 for United Technologies and 10.4 for Eaton. Danaher Corp. (DHR), which makes medical and dental equipment, had a price-earnings ratio of 17.4 in the period.
Cutler said Eaton, based in Cleveland will continue to acquire companies related to its electrical, aerospace and hydraulics businesses, further reducing exposure to trucks and autos.
“We believe Eaton’s shares represent significant value for long-term patient investors, possessing several avenues for growth and earnings enhancement of the combined companies,” Nick Heymann, a William Blair & Co. analyst in New York, said in a note today. He rates the shares market perform.
In the third quarter, Eaton’s truck unit saw sales plummet 23 percent on weak North American orders. Auto-parts sales dropped 12 percent because of lower European demand.
The electrical unit’s percentage of total sales will expand to 59 percent after adding Cooper from 45 percent in 2011 just as that business benefits from increased commercial-construction spending and a residential-construction rebound.
Sales at Eaton’s Electrical Americas unit rose 6.4 percent in the third quarter, and operating profit jumped 33 percent, the company said yesterday.
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