Eaton (ETN +3.02%) stock jumped in Friday trading after HSBC analyst Sean McLoughlin upgraded the power and electrical components giant to a buy rating and set a $400 price target.
As of 12:05 p.m. ET, Eaton shares are up 4.6%.
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Why HSBC loves Eaton
In his note, McLoughlin cited the growing need for artificial intelligence data centers -- and for "diversified" power management products to help run them -- for his optimism over Eaton. According to the analyst, this trend of growing investment in artificial intelligence gives Eaton stock "above-market growth prospects."
That's right, folks. HSBC just said Eaton is an AI stock.
Is Eaton stock a buy?
What are Eaton's "above-market growth prospects," exactly, and are they good enough to make the stock a buy?
According to the consensus of analysts polled by S&P Global Market Intelligence, Eaton's on course to grow earnings about 10% annually over the next five years. Eaton. McLoughlin, in particular, probably expects it to do better than that, because according to Morningstar data, S&P companies as a whole are expected to grow earnings at 10.5% over the same period -- and he'd better be right for Eaton stock to be a buy.
Valued on trailing earnings, Eaton stock costs a hefty 33 times earnings. Weak free cash flow of only $3.3 billion (versus $3.9 billion reported earnings) gives the stock an even more expensive price-to-free cash flow ratio of 39. With only a 1.2% dividend yield to make up the difference, I can't find a way to square the valuation on Eaton stock with McLoughlin's opinion that the stock is a "buy."
Eaton stock looks like a sell to me.
