Buy the new Eaton-Cooper or Facebook?

It all comes down to growth vs. value.

By Jim Cramer May 21, 2012 12:59PM

The new Eaton-Cooper or the brand new Facebook (FB) -- which stock would you prefer?

 

One company will have a hammerlock on industrial power everywhere from power plant to user. The other has 900 million users and counting.

 

One has divisions that can be sold and monetized to produce good growth, fabulous earnings ($6 and change in 2014), and a great yield. The other might be able to earn $2 in 2015 if it can monetize mobile advertising and use the personal data available to craft novel advertising solutions.

 

To me, the dichotomy speaks volumes about the stock market and the world right now. I would rather own an underhyped metal-bending U.S. company that is dominant in commercial construction, truck construction and aerospace than own an overhyped company that is a dominant social media play. 

 

Related Articles

 

Now that might not always be the case because price matters. I know going into the deal Monday, where Eaton (ETN) is buying Cooper Industries (CBE) by a considerable premium in a stock and cash deal, you couldn't give either stock away. They had both been hammered mercilessly despite reporting two of the best industrial quarters we have seen in 2012.

 

Both merged companies have European exposure and both are levered to worldwide growth. Eaton CEO Sandy Cutler, someone who has been on "Mad Money" after every quarter for years now, is probably one of the best industrial managers in the world. He's a shrewd steward of capital, but in the end his company his hostage to the business cycle. I do think that the 3.5% yield protects you from some of the vicissitudes of the market. In the end, though, until Monday, his company's shares were for sale everywhere.  

 

Facebook, on the other hand, has phenomenal growth and earnings. It isn't a fly-by-night company by any means and, with the exception of LinkedIn (LNKD), which is radically overvalued versus Facebook, the stock's worth something.

 

The problem is, what is it worth? What would you pay for that $2 in earnings for the outyears?

 

The answer I think is something like 15x earnings because as great as Facebook is, I am reluctant to give it more than a 40% premium to Google (GOOG) or Apple (AAPL), the other premier Internet and technology plays.

 

It is currently being valued well north of those two. No need for panic, though, because Amazon (AMZN), another potential analogue, sells at 22x 2015 earnings estimates and I am sure that when the smoke clears some of the growth guys will be buying Facebook "down here," betting it ultimately gets to an Amazon multiple, which would put it at $44.

 

The key is not to lose sight that the estimates for Facebook all depend on monetizing mobile, a tall order. The estimates that are being put together for Eaton might value this stock at only 8x earnings as a $5 number seems reasonable for next year and $6 the year after. Given that Eaton is shooting for 12%- to 14% sales growth and 20% earnings growth, this might be the cheapest of all industrials after this deal.

 

Look, it all comes down to growth versus value. If you are a growth manager, you are beginning to think that Facebook's getting real interesting here and that at $30 it is a plain old buy based on a 15 multiple. If you are a value manager, you are salivating at what the Eaton-Cooper merger will mean for the new company.

 

The bottom line: Eaton's much cheaper than Facebook. It's a buy. Facebook needs to come down more before it's safe to own.

 

 

Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust, and is long ETN, AAPL.

0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

114
114 rated 1
278
278 rated 2
474
474 rated 3
641
641 rated 4
639
639 rated 5
663
663 rated 6
640
640 rated 7
499
499 rated 8
284
284 rated 9
122
122 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
COPCONOCOPHILLIPS9
TAT&T Inc9
VZVERIZON COMMUNICATIONS9
KOGKODIAK OIL & GAS Corp9
CVXCHEVRON CORPORATION8
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.