A Member of Pat McKeough’s Inner Circle recently asked for his advice on an industrial conglomerate with 95 operating units that produces materials for a broad range of industries and sectors.
Pat likes the company’s track record of dividend increases and rising revenues and earnings. The balance sheet is also strong, while demand for the firm’s niche products remains robust.
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Parker-Hannifin Corp. (Symbol PH on NYSE; www.parker.com) is a global leader in providing motion and control technologies and solutions. Based in Cleveland, it operates in 45 countries across six continents.
The company’s range of industrial products is broad: active vibration control systems; elastomeric mounts and isolators; fuel cell sealing systems; air pollution control and dust collection systems and filters; heating, ventilation and air conditioning filters; compressed natural gas dispensers; fluid system and control fittings; meter valves; regulators, manifold valves, electrohydraulic pumps and pneumatic valves; engine exhaust nozzles and assemblies; and fuel systems and components.
Parker-Hannifin has two operating segments: Diversified Industrial (77% of revenue) and Aerospace Systems (23%).
In recent years, the company has moved to simplify its business by reducing its number of operating units to 95 from 130. It also acquired companies with higher growth rates, profit margins and cash flow.
Its most-recent acquisition, and its largest, closed in September 2022. The company acquired Meggitt Aerospace for $7.2 billion. Meggitt manufactures systems and equipment for the aerospace, defence and energy markets. Its 2021 sales were $2.1 billion.
Partly due to the acquisition, Parker-Hannifin’s revenues rose 33.4% over the past five years, from $14.3 billion in 2019 to $19.1 billion in 2023. (Fiscal years end June 30.)
By focusing on higher-profit-margin businesses, its earnings rose 37.7%, from $1.51 billion in 2019 to $2.08 billion in 2023. On a per-share basis, earnings rose 39.7%, from $11.48 to $16.04, due to fewer shares outstanding.
Inner Circle: Earnings and cash flow rise significantly
In the quarter ended March 31, 2024, revenue increased 1%, to $5.07 billion as compared to $5.06 billion a year earlier.
Excluding one-time items, the company’s earnings rose 10%, to $6.51 a share from 5.93% in the third quarter of fiscal 2023. Cash flow grew 20% to a record $2.1 billion (14.6% of sales) from $1.8 billion (12.8% of sales) a year earlier.
Parker-Hannifin’s balance sheet is sound: its long-term debt of $7.29 billion is just 10% of its market cap. It also holds cash of $405 million.
The company has increased its dividend for 67 consecutive years. Investors currently receive a quarterly payment of $1.48 per share. The annual rate of $5.94 yields 1.2%.
Parker-Hannifin expects its sales to grow by 3% to 6% in fiscal 2024. The stock trades at a reasonable 21.3 times the company’s forecast earnings of $22.40 a share. That multiple is reasonable given its dominant position in several niche markets.
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