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Morningstar | No Surprises in Parker Hannifin’s Latest Results Prompt Us to Maintain Our Fair Value Estimate

Nothing in Parker Hannifin’s latest fiscal 2019 third-quarter results alters our long-term view of the firm. The company had a solid quarter and maintained its full-year 2019 guidance. Our assumptions for 2019 top-line organic growth are in line with management’s expectations. As a result, we maintain our $183 fair value estimate for the stock, which we updated after its recently announced acquisition of Lord the week of April 29, 2019. We also retain our narrow moat, stable trend, Standard stewardship, and medium uncertainty ratings.

As we expected, management also is on track to meet its 17% segment operating margin (net of corporate expenses) by 2020, which we think highlights the strength of its Win Strategy, including focusing on key customers and simplifying Parker’s product lines. Parker’s total segment margin performance cleared that hurdle in the fiscal third quarter of 2019. Unsurprisingly, operating performance at aerospace also drove some of this outperformance. Like Eaton, the firm’s aerospace segment posted an all-time record (at a 20.7% segment operating margin). The company also increased its dividend by 16% and repurchase $200 million in shares. We like these shareholder-friendly initiatives as we assume Parker paid for the shares at appreciable discounts. The stock traded down to the $140s during month of January, implying Parker may have paid shares at about a 20% discount to our calculated intrinsic value.

Parker’s strategy, we believe, gives the firm a key advantage over a competitor like Eaton. While both firms earn similar margins in their respective Aerospace segments, for example, Parker is able to do this with comparably less capital expenditure requirements (Parker only spends about 1.5% to 2% of sales on capital expenditures). The firm has done a good job of implementing lean tools and reducing waste, whether with human capital or on the factory flow, which has flowed through in its comparably higher ROICs versus Eaton. Parker’s ROICs including goodwill hover between 13% to 16%, by our math, versus 9% to 12% for Eaton over the most recent five-year historic period.