This "Behind-the-Scenes" Stock Could Nearly TRIPLE

Tim Begany's picture

Friday, July 20, 2012 - 8:30am

by Tim Begany

Late last year, I wrote about  one of the best "behind-the-scenes" stocks around -- metal packaging maker  Crown Holdings Inc. (NYSE: CCK). I love companies like Crown because they "fly under the radar," quietly going about the business of providing vital products and services to big-name firms, while avoiding the extra risk of being in the spotlight.

Crown, for instance, provides aluminum cans for household names in the beverage industry, like Anheuser-Busch InBev (NYSE: BUD), Pepsico Inc. (NYSE: PEP) and Coca-Cola Co. (NYSE: KO). It certainly makes a pretty penny on aluminum cans and other types of metal packaging, raking in $8.7 billion of revenue during the past 12 months.

But I doubt Crown would be the first stock on investors' minds if, say, there was a rash of bad publicity about a potentially harmful ingredient in Coke, Pepsi or Budweiser. Nor would shares of Crown necessarily nosedive if sales of Coke, Pepsi or Anheuser-Busch products tanked, simply because there are many other beverages around the world packaged in aluminum cans. In my article, I estimated shares of Crown could double in three to five years, and I still think it could happen.

Well, there's another excellent behind-the-scenes stock I'd like to tell you about, and I think shares of this company actually have the potential to almost triple in the next three to five years. I'm talking about Eaton (NYSE: ETN), a large and well-diversified provider of hydraulics and power-management solutions for the automotive, aerospace and electrical-equipment industries.

Eaton is almost twice the size of Crown, in terms of market capitalization ($12.8 billion vs. $5.1 billion) and annual revenue ($16.2 billion vs. $8.7 billion). It's definitely a behind-the-scenes stock, because it makes a variety of components many industrial segments need -- hydraulic pumps, clutches, car and truck transmissions, circuit breakers, and steering and fluid distribution systems for military aircraft such as the F-35 fighter. The company boasts some high-profile customers, too, including Lockheed Martin (NYSE: LMT), Ford Motor (NYSE: F) and Boeing (NYSE: BA).

Analysts are forecasting brisk growth for Eaton during the next three to five years for several reasons, including the May 21 $11.8 billion purchase of electrical equipment supplier Cooper Industries PLC. Cooper is likely to be a lucrative acquisition because it generates $5.5 billion of annual revenue through the sale of products that complement Eaton's portfolio, such as electric hand tools, and electrical and circuit-protection systems. Management expects the acquisition to begin paying off quickly, boosting operating earnings per share (EPS) by $0.35 in 2014 and $0.45 in 2015.

Global expansion is another growth catalyst for Eaton. The company has increased international sales from 20% of annual revenue in 2000 to 50% currently, with Europe and other developed markets contributing 23% and developing markets kicking in 27%. I find it particularly encouraging that Eaton plans to keep stressing expansion in China and other developing markets, where there's strong demand for its auto and aircraft-related products, and for its hydraulic pumps used in wind-power generation. In July 2010, for instance, Eaton entered into a $1.8 billion joint venture with the Commercial Aircraft Corp. of China (COMAC) to design, develop and manufacture fuel and hydraulic-conveyance systems for COMAC's new commercial jet, the C919. The C919 is expected to become operational in about two years and will be comparable to Boeing's 737.

Ongoing technological advances should facilitate future growth, too. For instance, Eaton has revamped its valve technology for gas-powered motor vehicles to reduce emissions and increase fuel economy substantially. It's also developing transmissions for hybrid trucks; more efficient ground-fueling systems for commercial and military aircraft; and better hoses, couplings and seals for use in the aerospace industry, among many other new technologies.

Risks to Consider: Although it's well-diversified, Eaton is still engaged in fairly cyclical businesses, so performance may suffer during a downturn.

Action to Take --> Despite being affected by economic cycles, Eaton is typically profitable in the long-term because of customer loyalty and high-switching costs. Indeed, from 2001 to 2011, earnings grew from $0.83 per share to $3.96 per share, good for an annualized growth rate of almost 17%%. For the next three to five years, analysts predict a solid 8% growth rate, which would bring earnings to $6.45 per share in 2017.

It appears the stock is positioned for some potentially exciting growth, since investors have historically been willing to pay 16 times earnings for shares of Eaton. If you apply this multiple to 2017's projected earnings per share of $6.45, then you get a stock price of about $103. This would be a 170% gain from the current stock price. Better yet, even if the price-to-earnings ratio stayed at 9, where it is now, then the stock could still gain more than 50% in five years. And this is not even taking into account its very attractive 4% dividend yield.

Tim Begany owns shares of CCK, F.
StreetAuthority LLC owns shares of BUD, KO, F in one or more of its “real money” portfolios.