Stock Spotlight

Parker-Hannifin sells all over

 

An industrial conglomerate, Parker Hannifin ($550; PH) has exposure to commercial aerospace, a highly cyclical market. But the company also serves more than 450,000 customers across nearly every manufacturing, transportation, and processing industry, minimizing the risk of volatility in any one market. North America is Parker-Hannifin’s largest region (67%), followed by Europe (20%), Asia-Pacific (12%), and Latin America (1%).

The company makes more than 900,000 motion-and-control products, such as valves, pumps, filters, sensors, and hoses. These products tend to carry relatively small price tags, though they are highly technical and support customers’ critical systems, increasing potential costs to switch to a rival.

The stock isn’t cheap, reflected by its Quadrix® Value rank of 22. But it does appear timely, scoring in the top 15% of our research universe for Momentum, Earnings Estimates, and Performance. With an Overall score of 86, Parker-Hannifin is a Focus List Buy.

Pumping up profitability

For the 12 months ended December, Parker-Hannifin increased earnings per share 24%, sales 15%, operating cash flow 30%, and free cash flow 36%. That growth is being driven by aerospace systems (25% of sales for the 12 months ended December, 23% of operating profit), with sales up 57%. The diversified industrial segment for North America (45%, 47%) posted 7% higher sales, while the international diversified industrial business (29%, 30%) delivered 4% growth.

Sales growth decelerated to 3% in the December quarter, as strength in aerospace systems was partially offset by sluggish demand at both diversified industrial units, hurt by inventory destocking and softness in China. But operating profit margin expanded to 19.8% from 14.4%, the second-highest level for any quarter in the company’s history. Operating profit margin has increased in each of the past three fiscal years, as well as the first half of fiscal 2024 ending June. Management expects continued improvement.

Although some of its distributors have slowed orders, management remains upbeat, citing a near-record backlog of $10.8 billion. The company hasn’t experienced any major cancelations or order push-outs. In February, Parker-Hannifin raised its guidance for fiscal 2024, now projecting 11% to 14% higher earnings per share on revenue growth of 3% to 5%. Management also reaffirmed its outlook for fiscal 2027, forecasting per-share profits of $30.00, implying 7% annual growth. Up 21% this year, the stock trades at 23 times trailing earnings, in line with the median for the S&P 1500 Index machinery industry but below its three-year norm of 26.

Yielding 1.1%, Parker-Hannifin has grown its dividend at an annualized rate of 14% over the past five years, yet its payout ratio is just 25%.

Parker-Hannifin Corp., 6035 Parkland Blvd., Cleveland, OH 44124, (216) 8963000, www.parker.com.

 

 

 

 

Quadrix Scores

 

* Earnings exclude special items.
NA Not Available.
Quadrix® scores are percentile ranks, with 100 the best.
e Dividend and yield estimated.