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.
Now that might not always be the case because price matters. I know going into the deal this morning, 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 today, 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.