Two gurus are seeing value in Parker-Hannifin Corp. (PH, Financial) this year. Ken Fisher (Trades, Portfolio)'s firm added just over 36,000 shares in the first quarter of this year and followed up with another 115,000-share investment in the second quarter. During the three months ended June 30, Joel Greenblatt (Trades, Portfolio) also purchased 12,000 shares of the company.
Trading at a reasonable valuation, they may believe the stock looks attractive today.
Founded in 1917 as a global leader in motion and control technologies, the Cleveland, Ohio-based company provides solutions for a wide range of industries, such as aerospace, climate control, electromechanical, filtration, fluid and gas handling, hydraulics, pneumatics, process control and sealing and shielding. Parker Hannifin operates in two segments: diversified industrial and aerospace systems. The diversified industrial segment offers systems and solutions for applications requiring reliable technology and service in pneumatics, electromechanics, refrigeration, instrumentation, hydraulics, filtration and sealing. The aerospace systems segment sells engine and actuation components for the aerospace market. Parker is a Fortune 250 global leader in motion and control technologies and solutions.
The financial performance is trending in the right direction
For the fourth-quarter and fiscal year 2023, the company achieved record-breaking results across key financial metrics, maintaining operational excellence and ensuring its leadership position in several end markets.
Parker Hannifin's recent financial performance has showcased a remarkable growth trajectory. Revenue surged by an impressive 22% to reach a record high of $5.1 billion in the fourth quarter, with organic sales registering a 6% increase. The company's full-year sales figures revealed 20% growth, amounting to $19 billion, compared to the $15.9 billion reported in the previous fiscal year. This is also a record high for the company, which confirms the strong momentum behind its revenue growth.
Within the diversified industrial segment, North American fourth-quarter sales surged by 10% to $2.3 billion, while operating income saw a notable increase, reaching $490.8 million compared to $430.1 million in the same period a year ago. On the international front, the segment witnessed a 6% increase in fourth-quarter sales to $1.5 billion, with operating income of $309.4 million compared to $296.8 million in the prior-year period.
Meanwhile, in the aerospace systems segment, the company recorded a 90% surge in fourth-quarter revenue, totaling $1.3 billion, and operating income more than doubled, reaching $327.6 million.
Exhibit 1: Segment performance
Source: Earnings Call Presentation
While overall orders for Parker-Hannifin increased by 3% during the quarter ended June 30, there were some variations across segments. Orders for the diversified industrial North American businesses decreased by 8%, while orders for the diversified industrial international businesses decreased by 1%. In contrast, the aerospace systems segment witnessed a substantial 28% increase in orders on a rolling 12-month average basis.
Although certain challenges persist in terms of order volumes, Parker's enduringly robust backlog coverage, hovering around 55%, and the consistent efficacy of its Win Strategy underscore the company's resilience in navigating challenges in some of its end markets. The backlog has seen a sequential increase of 1%, which is an early indication of a change in fortunes for order volumes in key business segments.
The new strategy to drive sustainable growth
Parker Hannifin's Win Strategy 3.0 is the latest version of its strategic framework for achieving profitable growth. The strategy builds on the previous versions by focusing on four key areas: customer experience, profitable growth, engaged people and operational excellence.
Looking ahead to fiscal year 2027, Parker Hannifin foresees a strategic transformation where approximately 85% of its portfolio will be oriented toward long-cycle or aftermarket exposure. This shift is poised to introduce greater balance and stability into its business operations.
A key factor contributing to Parker's recent growth is its strategic acquisition of British manufacturer Meggitt PLC last summer in a deal valued at $8 billion. This acquisition has significantly bolstered the company's presence in key sectors, including the aerospace, defense and energy markets. The integration of Meggitt has yielded substantial benefits, doubling aerospace and defense sales. Notably, in fiscal year 2023, amid modest industrial growth, Parker's aerospace division thrived, benefiting from the sustained post-pandemic resurgence in the aerospace market, achieving an impressive 11% organic growth. This upward trajectory in aerospace and defense markets is expected to continue driving demand well into 2024 and beyond, reinforcing the company's optimistic outlook. According to an Accenture report, the commercial aerospace sector is poised for a substantial resurgence in 2023, with revenue projected to exhibit robust 14% year-over-year growth. This growth is expected to bring the sector's revenue close to the levels observed in 2019, signifying a remarkable recovery.
Exhibit 2: Aerospace industry recovery
Source: Accenture
Original equipment manufacturers remain steadfast in their momentum, building upon the progress of the preceding year. Notably, there was a remarkable 20% year-over-year increase in overall commercial deliveries during 2022, and this growth is anticipated to persist with an estimated 11% delivery increase in 2023. However, it is important to note the ongoing Middle East conflict can significantly impact the market's recovery.
For Parker Hannifin, the expected end market impact in the aerospace and defense sector by 2027 is anticipated to be approximately 33%, underscoring the sector's significance within its operations and growth strategy. The company is actively pursuing synergies, with a target of achieving $300 million in such synergies from the Meggitt acquisition by 2026. In addition to Meggitt, the company has strategically acquired other businesses that exhibit superior growth rates, profit margins and cash flow generation.
Exhibit 3: Parker's acquisitions
Source: Investor presentation
Parker's aggressive expansion into the aerospace sector is a timely move that is already proving to be value accretive. The company is still in the early stages of realizing synergies from many of its recent acquisitions, which suggests it still has a long runway to enjoy the full benefits of these investments.
The competitive landscape
Parker operates within fiercely competitive markets and industries, where Bosch Rexroth AG and Danaher Corp. (DHR, Financial) stand as formidable contenders, particularly in the diversified industrial segment. While Bosch commands a notable lead in terms of order intake, Danaher has encountered recent challenges. However, neither of these companies directly competes across every product group within Parker's diversified industrial segment. The company's robust position is fortified by a vast installed base of products that cater to a staggering 548,000 customers spanning virtually every manufacturing, transportation and processing sector. Notably, the company's customer base is diversified, with no single customer contributing more than 4% of its total net sales in fiscal 2023. Parker Hannifin's diversified industrial segment encompasses a wide array of hydraulic, pneumatic and electromechanical components, including valves, actuators and pumps, along with filters, hoses and seals. The company also boasts an extensive portfolio of intellectual property assets, including patents, trademarks, trade names, copyrights, trade secrets and licenses, which underpin its commitment to innovation and market leadership.
Although there is fierce competition in the industry, Parker Hannifin's scale, 360-degree product portfolio and strong customer relationships it has formed over the last few decades position it to thrive and enjoy economic profits for an extended period of time.
Valuation
The valuation of Parker Hannifin can be evaluated based on the five-year average forward price-earnings ratio, which stands at 16.6. With an estimated earnings per share of $23.4 for the next 12 months, the calculated fair value of the company based on historical averages is $388. Today, the stock is trading around $366, which suggests the company is slightly undervalued.
Parker Hannifin's robust financial performance adds to its investment appeal. The company has consistently exhibited revenue growth over the past five years. In fiscal 2023, its cash flow from operations surged by an impressive 22%, reaching $3 billion. This financial strength enabled it to retire $846 million in debt during the recent quarter, underscoring its commitment to sound financial management. Additionally, Parker Hannifin's history of dividend growth is notable, with the company recently increasing its quarterly dividend by 11% to $1.48. Remarkably, this marks the 67th consecutive year of dividend increases, reflecting its commitment to rewarding long-term shareholders.
Exhibit 4: Debt & leverage reduction
Source: Earnings Call Presentation
Moreover, Parker Hannifin's strong market position is worth highlighting. The company holds the number one position within the motion and control industry, which is a market valued at $135 billion. Despite the industry's fragmentation, Parker Hannifin currently commands around 13% market share. The company seems well-positioned to penetrate further into this market, increasing its share in the coming years. The long-term opportunity to achieve approximately 20% market share is a promising prospect, suggesting further growth potential for the company in the future.
Takeaway
Parker Hannifin seems attractively valued from a historical perspective today, and the company is continuing to grow, aided by the success of its diversification efforts. Recent investments in the company by Fisher and Greenblatt highlight how institutional investors are getting attracted to the company at or around the current valuation level. Long-term-oriented investors may find Parker Hannifin an attractive bet at the current market price of around $365.
