Morningstar | We Lift Our Parker FVE to $183 After the Acquisition of Lord. See Updated Analyst Note from 29 Apr 2019
Parker announced it is acquiring Lord Corporation, which brings Parker an attractive portfolio of adhesives, as well as specialty materials and vibration control technologies. Parker will fold this acquisition in with the rest of its engineered materials group, under its diversified industrial segment. After evaluating the deal, we lift our fair value to $183 per share from $178 previously, which reflects our view the deal is value-accretive. While not optically cheap at an EV/adjusted EBITDA of 15.1 times (higher than 3M), the once privately-owned firm has superior EBITDA margins and a better long-term growth trajectory of 5.5% per year. Importantly, it also spends about 8% of sales on R&D (compared with 6% of sale for wide-moat-rated 3M).We were impressed with the moat around this business. Lord benefits from many of the moat sources present in the rest of Parker's portfolio, including switching costs and intangible assets. While a small part of a customer's bill of materials, much of its products serve mission critical functions with a high cost of failure. Long-term contracts lasting decades are common in this business, including in aerospace applications. Lord also has a multidecade long history, and its strengths complements Parker's technologies, particularly in vibration dampening and isolation, as well as adhesion and coating science. After speaking with management today, we believe a significant portion of Lord's portfolio is protected by intellectual property.
Finally, management's EBITDA margin cost synergy targets seem very achievable. Parker targets run-rate synergies of $125 million by 2023 (year 5 of our model). Yet, management doesn't add any revenue synergies from cross-selling opportunities, which gives the deal positive upside value. Finally, we attribute some of Lord's superior margins to a greater proportion of distribution revenue compared with the rest of the engineered material group, which we think is a welcome surprise.
Parker Hannifin is a manufacturer of motion and control technologies and systems, providing engineered solutions for a variety of mobile, industrial and aerospace markets. The company has two reporting segments: Diversified Industrial and Aerospace Systems. The company's Diversified Industrial segment products consist of a range of motion-control and fluid systems and components, which are categorized into the following groups: Engineered Materials, Filtration, Fluid Connectors, Instrumentation, and Motion Systems. The company's Aerospace Systems Segment products are used in commercial and military airframe and engine programs and include control actuation systems and components and pneumatic control components.
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