It's understandable that investors are nervous about the global economy. There's a lot of scary news out there. But some of the better industrial companies out there are really taking it on the chin. And it may be an overreaction. Eaton (ETN) is a case in point.
Shares of the Cleveland-based maker of electrical components and power systems for trucks and automobiles fell on heavy volume Monday. There was no company specific news but investors may be worried about the poor factory orders number for April that the government released Monday morning. Investors may also still be jittery following last week's warning from mining equipment company Joy Global (JOY).
But Eaton, along with industrial equipment companies like Caterpillar (CAT) and Cummins (CMI) may be oversold. "Does the current weakness in the global economy really justify a 30% selloff in $CMI and $CAT. Not to mention a 26% decline in $ETN" wonders sld1986 over on StockTwits.
No. I talk with Eaton CEO Sandy Cutler every couple of months about the global economy and find him to be refreshingly candid. There's no BS and no jargon. We last spoke in April about the problems in Europe. He warned that the worst was not over. But the company has made an interesting move in Europe since then, agreeing to buy Irish-based electrical components maker Cooper Industries (CBE) for $11.8 billion.
That may make some investors worried. But it takes guts to announce a merger in these tumultuous times and even more guts to strike a deal anywhere in Europe. If Eaton pulls off the Cooper deal with minimal integration issues, people will look back at this time as one where the stock was unusually cheap. Shares now trade at 8.5 times 2012 earnings estimates. Profits are expected to increase 14% this year and in 2013. Cleveland rocks and so should Eaton's stock.