Like many industrial companies, Eaton Corporation plc (NYSE:ETN) went through a rough patch a few years ago. Then its business started to pick up again, and the stock rallied. This year, though, Eaton's stock has gone sideways even though the company's business continues to improve. Add in a 3.5% yield, and this globally diversified industrial giant is offering investors a lot of value despite the rich valuation of the overall market.

The value proposition

Eaton is trading with a trailing price-to-earnings ratio of roughly 11 today. The average P/E for the Vanguard Industrials ETF is a little over 17 (the broader market's PE is around 20).  That makes Eaton look pretty cheap relative to its broader peer group (and the market). But the stock is also cheap relative to its own history. Its trailing-five-year average P/E is nearly 17, closer to what the industrial sector's average is today.

Two men in blue hard hats looking at blueprints with an industrial facility behind them.

Image source: Getty Images.

Eaton's dividend yield of around 3.5%, meanwhile, is toward the high end of its historical range. And it's over 1.5 percentage points higher than you'd get from buying the Vanguard Industrials ETF or an S&P 500 index fund today. Meanwhile, the company has increased its dividend every year for the past nine years (it paused increases for a little while about a decade ago, when it made a large acquisition).

Even though the market looks expensive, Eaton appears to be offering investors a decent entry point today.

What's the backstory?

Valuation alone, though, doesn't provide the full picture. Eaton isn't just relatively cheap today; it's also seeing solid performance across its portfolio. Every one of its five main divisions experienced year-over-year sales growth in the first quarter of 2018.

Division

Percentage of Sales

Revenue Growth

Electrical products

33%

5%

Electrical systems and services

26%

4%

Vehicles

17%

14%

Hydraulics

14%

21%

Aerospace

9%

7%

Data source: Eaton Corporation plc.

Overall, Eaton's sales grew 8% in the first quarter, with earnings advancing a lofty 15%. Organic sales growth was an impressive 6%, with the rest of the year-over-year increase related to currency fluctuations. The company also managed to improve its operating margin by 80 basis points. Based on those numbers, Eaton upped the dividend a robust 10%.   

For the full year, Eaton is expecting organic revenue growth to be around 5%. That's an increase of 1 percentage point over what it was forecasting at the end of 2017. The upward adjustment is related to an improved outlook for the hydraulics and vehicle divisions. So, not only is Eaton relatively cheap today, but it is performing well and has solid prospects for the rest of the year.   

It also made a strategic announcement in the first quarter with the introduction of its eMobility division. The new unit is targeting the electric vehicle market with a focus on heavy trucks. That said, eMobility is just a tiny contributor today (less than 2% of sales), with Eaton pulling together pieces of its electrical products and vehicle operations to create the new group. However, the company is already working with customers on new products and expects organic revenue growth of 12%. That's off a small base, to be sure, but Eaton thinks the division could generate as much as $4 billion in sales by 2030. This is an exciting growth opportunity to keep an eye on.   

Time for a deep dive

If you're looking at the stock market with a wary eye -- which makes sense given the S&P 500's current lofty valuation -- you shouldn't despair. There are still companies offering investors both a good entry point and growth potential. Eaton is one of them, with a reasonable P/E, solid first-quarter results, decent prospects for the rest of the year, an exciting new division, and a recent 10% dividend increase. No, Eaton isn't going to be a name you drop at cocktail parties (few will have heard of it), but it looks like it could be a very rewarding investment.

Reuben Gregg Brewer owns shares of Eaton. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.