Stock Analysis on Net
Stock Analysis on Net

Eaton Corp. plc (NYSE:ETN)

Present Value of Free Cash Flow to Equity (FCFE) 

Microsoft Excel

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company asset base.

Intrinsic Stock Value (Valuation Summary)

Eaton Corp. plc, free cash flow to equity (FCFE) forecast

US$ in millions, except per share data

Microsoft Excel
Year Value FCFEt or Terminal value (TVt) Calculation Present value at 15.51%
01 FCFE0 3,665
1 FCFE1 3,908 = 3,665 × (1 + 6.64%) 3,384
2 FCFE2 4,215 = 3,908 × (1 + 7.85%) 3,159
3 FCFE3 4,597 = 4,215 × (1 + 9.06%) 2,983
4 FCFE4 5,070 = 4,597 × (1 + 10.28%) 2,848
5 FCFE5 5,652 = 5,070 × (1 + 11.49%) 2,749
5 Terminal value (TV5) 156,866 = 5,652 × (1 + 11.49%) ÷ (15.51% – 11.49%) 76,289
Intrinsic value of Eaton Corp. plc common stock 91,412
 
Intrinsic value of Eaton Corp. plc common stock (per share) $233.19
Current share price $259.47

Based on: 10-K (reporting date: 2024-12-31).

1 See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Required Rate of Return (r)

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Assumptions
Rate of return on LT Treasury Composite1 RF 4.94%
Expected rate of return on market portfolio2 E(RM) 15.05%
Systematic risk of Eaton Corp. plc common stock βETN 1.05
 
Required rate of return on Eaton Corp. plc common stock3 rETN 15.51%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

2 See details »

3 rETN = RF + βETN [E(RM) – RF]
= 4.94% + 1.05 [15.05% – 4.94%]
= 15.51%

FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Eaton Corp. plc, PRAT model

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Average Dec 31, 2024 Dec 31, 2023 Dec 31, 2022 Dec 31, 2021 Dec 31, 2020
Selected Financial Data (US$ in millions)
Cash dividends paid 1,500 1,379 1,299 1,219 1,175
Net income attributable to Eaton ordinary shareholders 3,794 3,218 2,462 2,144 1,410
Net sales 24,878 23,196 20,752 19,628 17,858
Total assets 38,381 38,432 35,014 34,027 31,824
Total Eaton shareholders’ equity 18,488 19,036 17,038 16,413 14,930
Financial Ratios
Retention rate1 0.60 0.57 0.47 0.43 0.17
Profit margin2 15.25% 13.87% 11.86% 10.92% 7.90%
Asset turnover3 0.65 0.60 0.59 0.58 0.56
Financial leverage4 2.08 2.02 2.06 2.07 2.13
Averages
Retention rate 0.45
Profit margin 11.96%
Asset turnover 0.60
Financial leverage 2.07
 
FCFE growth rate (g)5 6.64%

Based on: 10-K (reporting date: 2024-12-31), 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31).

2024 Calculations

1 Retention rate = (Net income attributable to Eaton ordinary shareholders – Cash dividends paid) ÷ Net income attributable to Eaton ordinary shareholders
= (3,794 – 1,500) ÷ 3,794
= 0.60

2 Profit margin = 100 × Net income attributable to Eaton ordinary shareholders ÷ Net sales
= 100 × 3,794 ÷ 24,878
= 15.25%

3 Asset turnover = Net sales ÷ Total assets
= 24,878 ÷ 38,381
= 0.65

4 Financial leverage = Total assets ÷ Total Eaton shareholders’ equity
= 38,381 ÷ 18,488
= 2.08

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.45 × 11.96% × 0.60 × 2.07
= 6.64%

FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (101,712 × 15.51% – 3,665) ÷ (101,712 + 3,665)
= 11.49%

where:
Equity market value0 = current market value of Eaton Corp. plc common stock (US$ in millions)
FCFE0 = the last year Eaton Corp. plc free cash flow to equity (US$ in millions)
r = required rate of return on Eaton Corp. plc common stock

FCFE growth rate (g) forecast

Eaton Corp. plc, H-model

Microsoft Excel
Year Value gt
1 g1 6.64%
2 g2 7.85%
3 g3 9.06%
4 g4 10.28%
5 and thereafter g5 11.49%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpolation between g1 and g5

Calculations

g2 = g1 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= 6.64% + (11.49% – 6.64%) × (2 – 1) ÷ (5 – 1)
= 7.85%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 6.64% + (11.49% – 6.64%) × (3 – 1) ÷ (5 – 1)
= 9.06%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 6.64% + (11.49% – 6.64%) × (4 – 1) ÷ (5 – 1)
= 10.28%