Jim Cramer's Get Rich Carefully by James J. Cramer

Author:James J. Cramer
Language: eng
Format: azw3, epub, mobi
Publisher: Penguin Group US
Published: 2013-12-31T00:00:00+00:00

• Sandy Cutler, Eaton

During the old days at my hedge fund, every time the economy would falter I would be on the prowl for stocks to short, typically those that were known to underperform when things got tough. On my short list, always? Eaton. Here’s a company that made key components for trucks, and in an economic downturn the last thing enterprises need are more trucks. So the stock would be hammered mercilessly.

All that changed when Sandy Cutler became Eaton’s CEO in August 2000 and decided to reinvent the company as an electronics and power generation company with an emphasis on saving and cutting energy costs, something both the greens and the hard-headed businesspeople alike favor.

Over the past five years, Cutler has allocated 80 percent of Eaton’s free cash flow to acquisitions, with an emphasis on strategic markets and regions, particularly Asia, with attractive opportunities for growth and profitability and proprietary content in products and services. The vast majority of these acquisitions were tuck-ins, augmenters of already strong franchises, until 2012, when Cutler made his boldest move yet, buying Cooper Industries for $11.8 billion, a transformative and value-adding acquisition I chronicled in a previous chapter. So often I read about how companies that make large acquisitions often find themselves overpromising and underdelivering. Not Cutler. Eaton and Cooper competed against each other for years in key electronic component jobs. Now they are united. Many of their product lines were compatible with each other, so the deal, which was wildly accretive from the get-go—meaning earnings estimates could be raised dramatically upon the completion of the merger—has brought in new business that one or the other couldn’t get on its own. The Cooper deal makes Eaton either number one or number two in every kind of electronic market it plays in.

I believe that the merged entity will give Eaton at least two years of solid earnings surprises, even if the economy falters. No wonder Cutler’s Eaton receives the highest price-to-earnings multiple in the group. It deserves it. Even when it failed to meet expectations in the summer of 2013, the stock was able to maintain its lofty position, dropping just a few points on the news and then, miraculously, coming right back, as investors clamored to get in during the first real price break since the Cooper deal. It sure didn’t last long, though.

While the stock is a big play on the domestic recovery, with about half of its revenue tied to the United States, Eaton’s portfolio is fairly balanced across the entire economic cycle. It has so-called early cycle businesses, those that do well coming right out of a downturn, such as residential construction (think your fuse box) and vehicle production, both autos and heavy-duty trucks. It has mid-earnings cycle operations, which include hydraulics and midsize data centers, that are real energy hogs. And it has late cycle applications, namely commercial aerospace, utilities and nonresidential construction.

During the darkest days of the Great Recession I would ask Sandy to come on to talk

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