Core Viewpoint - Eaton Corporation is attracting significant investor interest due to its exposure to the growing data center infrastructure market and the "electrification of everything" megatrend, raising questions about its current valuation and growth prospects [1] Valuation Change - Historically, electrical and power products companies were seen as mature with low growth, typically valued at an enterprise value to EBITDA ratio of about 11 and a price-to-free-cash-flow ratio of about 20 [2] - Recent years have shown a notable increase in the valuation investors are willing to pay for Eaton, reflecting a shift in sentiment [3] Growth Prospects - Eaton's revenue growth rate has improved significantly, with a three-year average revenue growth rate increasing from 2.7% in 2019 to 8.2% in 2024, driven by data center demand, particularly in North America [5] - The Electrical Americas segment is projected to contribute significantly to Eaton's growth, with operating profit expected to rise from $1,913 million in 2022 to $3,455 million in 2024, marking an increase of 87.5% [6] - Data centers are anticipated to become Eaton's second-largest end market, contributing 17% of total revenue by 2025, alongside utilities, which are expected to account for 11% of revenue [7] Market Trends - Eaton benefits from the "electrification of everything" trend, with strong demand from defense and aerospace sectors, projected to account for 6% of sales in 2025, and growth in commercial aerospace expected to be driven by Boeing and Airbus production ramp-ups [8] Revenue and Earnings Growth - Wall Street analysts forecast Eaton's revenue to grow at a 9% compound annual growth rate (CAGR) through 2027, with earnings expected to grow at nearly 14% annually [9] Considerations for Investors - Data centers and utilities are projected to account for 28% of revenue in 2025, but the sustainability of growth in AI-driven data center spending is uncertain [9] - The eMobility segment is currently unprofitable, and while it is expected to grow at a double-digit rate to 2030, the internal combustion engine components business is only expected to grow in low single digits, potentially leading to margin pressure [10] - Eaton's valuation appears high compared to non-pure play data center peers, suggesting that investors seeking pure-play data center exposure might consider alternatives like Vertiv [11] Current Valuation Metrics - Eaton is trading at an EV/EBITDA of 19 and a price-to-free-cash-flow of 28.6 based on 2027 estimates, indicating that the stock may be fully valued and requires a significant increase in data center spending expectations to appear attractive [13]