Can Eaton Keep on Trucking?

06/10/2008 12:00 am EST


Mark Fightmaster

Financial Analyst, Schaeffer's Investment Research, Inc.

Mark Fightmaster of Schaeffer's Investment Research says the truck-parts manufacturer has changed its ways and now looks ready fundamentally and technically to move higher.

A recent article in Barron's takes a look at Eaton (NYSE: ETN), which is a major supplier of parts for automobiles and heavy trucks ("A Bargain on 18 Wheels," June 2nd).

While some may think that a company related to trucks and cars would struggle (especially in the past eight years), that is not the case with ETN-and a good deal of the credit rests squarely on the shoulders of CEO Alexander Cutler.

The company has reduced its dependency on cars and trucks and has moved toward a "greener" solution. ETN recently landed orders for 207 hybrid vehicles in China and 200 electric hybrids for UPS.

ETN is an evolving company, as it is helping to make the trucking industry become more sustainable and efficient by developing hybrid-fuel systems. Jim Madden, a senior portfolio manager at Portfolio 21, notes that ETN has "gotten away from being a totally cyclical truck supplier and moved into less capital-intensive systems." In addition, some analysts and investors believe that "the domestic heavy-truck market is bottoming and may turn upward soon."

To say ETN is a solid performer would be an understatement. While the 52-week, 26-week, and year-to-date performance isn't overwhelming (nor is it underwhelming), the stock has managed to log gains in a tough market. With the stock resting in the upper reaches of the $96 region, it maintains potential support from its ten- and 20-month moving averages, along with the $95 level. This level acted as both support and resistance in the past.

In the face of the equity's solid performance, there is room for further upside thanks to sentiment. ETN's Schaeffer's put/call open interest ratio (SOIR) of 0.91 is lower than 70% of those taken during the past 52 weeks. Yes, this is an inherently bullish reading, but the pessimism available could unwind and push the stock higher. Furthermore, half of the 14 analysts following ETN rate it a Hold or worse.

Yes, there could be momentum-killing downgrades, but there is an equal potential for upgrades. Should the stock continue to advance, this sentiment could shift and help push ETN through overhead resistance at the psychologically significant $100 level. (The stock closed Monday at around $95.50-Editor.)

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