EUR 850.00 For Business Accounts Only

Morningstar | Narrow-Moat Parker Turns in a Solid Fiscal 1Q to Open its New Year. See Updated Analyst Note from 01 Nov 2018

Narrow-moat-rated Parker Hannifin had a solid first quarter to kick off its fiscal 2019 calendar, but our long-term outlook remains the same. After incorporating the time value of money since our previous update as well as the firm’s most recent results into our model, we raise our fair value for the firm to $175 from $165. Our current fair value implies about a 15 times multiple to our new estimated $11.34 fiscal 2019 adjusted EPS figure, just below management’s midpoint figure. The total firm posted strong organic growth of 6% year over year, as well as segment adjusted operating margins of 17.2%, which increased about 140 basis points from the prior year. The company updated its guidance range for adjusted EPS (to $11.10-$11.70), year-over-year revenue growth (to 0.5%-3.3%), and adjusted segment operating margins (16.6%-17.2%). The firm also provided a key update on its CLARCOR (filtration company acquisition) integration, which is progressing as expected. The firm is on pace to realize the $160 million in run rate synergy savings by fiscal year 2020.

We’ve been impressed by how the firm has reached goals set during its 2015 Investor Day two years earlier than expected. For example, the firm has targeted growth of 150 basis points greater than the market using global production as a proxy, and it has its target. Unsurprisingly, aerospace has also been performing well, growing over 6% year over year organically and improving adjusted operating margins by an impressive 480 basis points year over year. Management indicated that it is seeing prior year investments pay off. Fortunately, this is a long cycle business, meaning investors should be able to reap the benefit of these investments over the next couple of years. Management has indicated it’s prioritizing organic growth over other capital allocation priorities as well.

Management also reiterated its intent keep continue driving the firm’s “Win” strategy, which focuses on engaging people, the customer experience, growth, and financial performance. One tangible metric on which the firm focuses to track engagement is safety, for example. The firm recorded a 20% reduction in safety incidents for the quarter. One insight we picked up on the call is management’s optimism looking toward the future and its order visibility. Orders are doing well against some tough comps despite geopolitical issues, which gives us confidence in our valuation of the firm.