Parker Hannifin's Portfolio Looks Strong as Ever and Backlogs Remain Robust

Equity Analyst

Spencer Liberman

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Diversified North America

Diversified International

Aerospace Systems

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Parker Hannifin is a well-run diversified industrial conglomerate with exposure to a wide variety of end markets. Over time, we believe the firm can achieve its goals of outpacing industrial production and margin expansion on the heels of its newest Win Strategy and large acquisitions of Clarcor, Lord, Exotic Metals, and Meggitt. We believe part of Parker’s strength lies in its broad range of motion and control technologies with a wide variety of applications, including hydraulics and pneumatics, fluid and gas handling, and sealing. Parker says about 85% of the revenue from these technologies has intellectual property protection, which we believe helps cement its competitive position, given the long product lifecycles and low reinvestment needs of this business. Parker's acquisitions brought in technologies that filled major gaps in its existing portfolio, including in filtration, engineered materials, and vibration technologies. With these acquisitions, the firm gains an even stronger foothold in the highly attractive higher-margin aftermarket and doubles down on long-cycle businesses.

Win Strategy 3.0 is Parker's "secret sauce" that drives margin expansion and working capital improvements. Our thesis primarily relies on Parker's ability to successfully integrate its large-scale acquisitions and improve working capital in line with the company's historical core figures as well as margins through initiatives like design and product line simplification, productivity initiatives that improve inventory turns, improved supply chain sourcing, and other lean initiatives. We also expect that Parker's international business can still drive similar margins to the North American business with continuing strength in distribution.

These factors lead us to expect Parker to increase its top line by about a 5% organic compound annual growth rate over the next five years and expand non-GAAP adjusted segment operating margin (before acquisitions and corporate costs) by over 300 basis points from 2023 levels by 2028.

Business Strategy & Outlook

We believe Parker Hannifin merits a narrow economic moat rating based on switching costs and intangible assets. We think the total company benefits from a large installed base of products, which according to its annual report are supplied to "459,000 customers in virtually every manufacturing, transportation, and processing industry." 

Parker’s diversified industrial segment consists of sales of an assortment of various hydraulic, pneumatic, and electromechanical components, including valves, actuators, and pumps, as well as filters, hoses, and seals. In addition to Parker’s field sales employees, the diversified industrial segment’s approximately 17,100 independent distributor locations throughout the world—the blade in Parker’s razor-and-blade model—heavily support Parker’s installed base. Parker has curated this distribution network over 60 years. Based on Parker’s past comments, we estimate that the 10-point-higher-margin aftermarket distribution business typically represents about half of Parker’s industrial business through an economic cycle, which we believe evidences switching costs. We calculate that this segment has historically earned return on invested capital including goodwill of approximately 14% through the cycle.

Parker’s distributors help the company reach its various end markets with their highly technical level of expertise, with some customer relationships lasting for years. Less available skilled labor that can appropriately address the specific and ongoing equipment service requirements of Parker’s customers only serves to reinforce these switching costs, in our view. It is difficult for customers to find other qualified maintenance technicians, given the highly specialized nature of Parker's equipment. Other factors that reinforce switching costs include the mission-critical, complicated, and long-lead-time nature of Parker’s equipment, specifically in aerospace, automotive, and other transportation applications. 

A high cost of failure in some of Parker’s end markets could translate to thousands of dollars per minute of downtime if an offshore seal fails in the oil and gas industry, at best. At worst, seal failure could lead to loss of lives in the aerospace industry, for example. While a sealing solution isn’t the largest item on a bill of materials, customers tend to heavily rely on injection molders for technical expertise. While Parker's products are a small part of a customer's total project costs, they are vitally important to its success. Parker’s sealing solutions are highly engineered products based on proprietary materials and are designed to keep tight tolerance and resist higher temperatures. Parker’s tight tolerance expertise must confront several factors, including part design and complexity, material selection, tooling, and process design and control. 

Designing a part is the most important factor in controlling tight tolerance. Part walls can have differential shrink rates based on the thickness of different sections. Alternatively, if a part has larger dimensions, it can make it more challenging to control and maintain tight tolerance. Sealing solutions must also withstand various temperature ranges, such as extreme heat and corrosion commonly associated with aircrafts taking off and landing, or extreme pressure from deep seawater conditions. Parker's design precision specifically leads to asset optimization, but it can also lower a company's total cost of ownership. Additionally, customers using non-Parker parts in any piece of equipment purchased from a distributor without the express permission of the company voids that equipment's warranty.

A high degree of content on a specific platform reinforces switching costs. Parker’s broad aerospace portfolio, for example, includes flight control actuation, fuel pumps and valves, hydraulic equipment for commercial airframe manufacturers on programs like the Airbus A350, Boeing 777x, and Boeing 787; military programs like the F-35; and engine components like on CFM’s Leap engine, General Electric’s GEnx engine, and Rolls-Royce’s Trent engine programs (specifically, the XWB, the 1000, and the 7000). For aerospace, we estimate returns on invested capital including goodwill have historically averaged about 22% through the cycle. Nevertheless, we think the aerospace segment merits a narrow moat instead of wide, given the bargaining power of airframe manufacturers like Boeing and Airbus and their ability to pressure price from their supply chain, as well as comparably less intellectual property protection in just under half of the segment’s portfolio. 

Parker also benefits from intangible assets. Aside from technical expertise and highly engineered products backed by intellectual property like patents, intangibles include a broad breadth of technology with long product lifecycles and low investment requirements, as well as a long record of success. Over 60% of Parker’s revenue goes through customers that buy from four or more of Parker’s technological core competencies, including in hydraulics, pneumatics, electromechanical, filtration, fluid and gas handling, process control, climate control, and sealing and shielding. Furthermore, according to Parker representatives, the firm holds a number-one or -two share in many of the industrial markets it serves. The acquisition of Clarcor in 2017 not only strengthened Parker’s competitive position in the filtration aftermarket with its favorable 80% revenue exposure, but it also shored up its technology offering in the filter and industrial HVAC markets. 

We can glean examples of Parker’s technology in its product portfolio. Sensors are generally critical when assessing systems that use fluids (water, oil, or gas) to either generate power or transfer liquids or gas from one point to another. Factors like pressure, temperature, humidity, and vibration are critical in these systems when it comes to producing quality. Variations in pressure materially hamper production while extreme temperatures can lead to undesirable results. The large quantity of data collected by sensors is itself proprietary, since Parker can convert that data into algorithms that identify defective equipment and can trigger corrective action before catastrophe strikes. Aside from predictive maintenance benefits, sensors also obviate the need for manual reading of equipment. Industry journals citing the U.S. Department of Energy state that minimizing downtime has been shown to increase production by as much as 25% while increasing asset availability by 30%.

Taking a specific example, trade journals highlight wireless vibration sensors. Wireless sensors can used in a manufacturing process (like power plants, food and beverage packaging facilities, or paper and metal manufacturing facilities, among others) and configured to transmit data, set alarm thresholds, and create product notifications. The design, moreover, allows for low-cost, easy installation. Other products like Parker’s hand-held meters provide portable maintenance and diagnostic data for hydraulics and pneumatics, and automatic sensor recognitions eliminate the setup time that can be both confusing and time-consuming for operators. Solutions like these are especially valuable in hazardous environments, since they allow the user to keep a safe distance from dangerous areas. 

In the electro-pneumatic space, Parker Hannifin has introduced a range of pressure regulators that provide precise control and energy savings in railcar applications but are also built to withstand extreme temperatures up to negative 40 degrees Celsius, which extends its useful life. Other pneumatic applications, such as air saver units found in factor air nozzles and air gun applications, cut compressed air costs by 40%-50%. Technology leading to cost savings matters because compressed air systems require huge expenditures of energy and costs that are often overlooked when calculating a plant’s cost of production. Industry trade journals citing the U.S. Department of Energy state that the cost of air ranges from 16 cents to 30 cents per 1000 cubic feet. Yet, only 12.5 cents of every dollar spent on electricity to generate compressed air is doing useful work.

In filtration, Parker’s top-loading compressed air filters, which are designed to protect internal components of a refrigerated dryer, can remove up to 99% of solid and liquid contaminants, which allows for easier replacement. These filters were previously awarded a product of the year award by Plant Engineering. In flow meters, which are within the fluid control division and monitor the flow of cooling fluid used in welding, pump seal water, or boiler feed water applications, Parker’s meters feature no moving parts to clog or wear out, which contribute to a long product cycle, but are also designed to monitor particulates with a high amount of accuracy and permits occasional overranging up to 125% of capacity without damaging the meter. 

Parker Hannifin’s returns on invested capital, including goodwill, have safely exceeded our estimated weighted average cost of capital of 8.2%, at an average of nearly 14% over the past 10 years. Ultimately, we believe it is more likely than not Parker can continue this normalized level of performance over the next 10 years.

Narrow

Economic Moat

Parker-Hannifin

Parker-Hannifin Corp. engages in the manufacture of motion and control technologies and systems. It operates through Diversified Industrial and Aerospace Systems segments. The Diversified Industrial segment sells products to both original equipment manufacturers and distributors who serve the replacement markets in manufacturing, packaging, processing, transportation, mobile construction, refrigeration and air conditioning, agricultural and military machinery, and equipment industries. The Aerospace Systems segment offers products primarily in the commercial and military aerospace markets to both OEMs and to end users for spares, maintenance, repair, and overhaul. The company was founded by Arthur L. Parker in 1918 and is headquartered in Cleveland, OH.

Earnings data Q4 2021

Earnings data Q1 2022

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Earnings data Q4 2022

Earnings data Q1 2023

Earnings data Q2 2023

Earnings data Q3 2023

Earnings data Q4 2023

Earnings data Q1 2024

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Earnings data Q3 2024

Parker-Hannifin reports stellar Q3 performance and raises full-year guidance

Parker-Hannifin's Q1 2023 earnings call showcased outstanding performance, increased guidance, and a strong outlook. The company's integration of Meggitt is ahead of schedule, with increased synergies and a commitment to achieving $300 million in synergies by FY 2026. Despite challenges in working capital and the supply chain, the company is well-positioned for long-term growth and has a clear strategy for managing through economic downturns.

Parker Hannifin achieves record Q4 performance and targets sustainable growth

Parker Hannifin's Q4 performance was exceptional, driven by record sales, margin expansion, and strong cash flow. The company's strategic reshaping and commitment to carbon neutrality position it for sustained growth. While facing challenges in the aerospace supply chain, the company is well-positioned to capitalize on aerospace and industrial opportunities.

Parker Hannifin reports record Q1 sales and robust aerospace performance

Parker Hannifin's Q1 performance reflects strong sales, robust backlog, and margin expansion. The company faces challenges in international orders and expects Europe to turn slightly negative. However, opportunities lie in future sales growth drivers and cost management strategies.

Parker Hannifin reports record sales and margin expansion in Q4 2023

Parker Hannifin reports exceptional performance with record sales and margin expansion. The company is committed to debt reduction and has improved leverage. The outlook includes increased reported sales growth and raised aerospace and international organic growth. Management expresses appreciation for the support and offers availability for any follow-up inquiries.

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Parker-Hannifin (PH) affirms that the terms of its recommended acquisition of Meggitt have been approved by the latter's shareholders. The deal will be closed in the third quarter of calendar 2022.

Parker-Hannifin's (PH) Deal to Acquire Meggitt Gets Approval

CLEVELAND, Sept. 21, 2021 (GLOBE NEWSWIRE) -- Parker Hannifin Corporation (NYSE: PH), the global leader in motion and control technologies, confirms that Meggitt Shareholders have today approved the terms of the recommended cash acquisition of the entire issued and to be issued ordinary share capital of Meggitt PLC as announced on August 2, 2021. The transaction will proceed and is expected to close in the third quarter of calendar year 2022.

Parker Hannifin Recommended All Cash Offer for Meggitt PLC Approved by Meggitt Shareholders

Parker-Hannifin (PH) is poised to benefit from strength across end markets, acquisitions, and shareholder-friendly policies. High costs and debt levels weigh on the company.

Parker-Hannifin (PH) to Gain From Strong End Markets Despite Risks

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TransDigm

Two Cleveland rivals have their eyes on a target across the pond.

Why 2 Aerospace Giants Are Going to War Over This British Gem

Parker posted strong fiscal fourth quarter results, but the beats weren't as large relative to expectations as other multi-industrials; exclude the aero business and organic growth was definitely above average. Parker's pursuit of Meggitt makes sense, even if the prospective returns are more "good" than "great"; a rival bid from TransDigm could be more than Parker wants to pay, though.

Parker-Hannifin Looks So Tempting Today

Meggitt plc seems keen to be taken over by Parker-Hannifin Corporation as it published relevant documents, even though TransDigm Group Inc is still in the wings. On Friday, TransDigm made an unsolicited and “preliminary” offer of 900p per share, a week after the FTSE 250 company's board backed an 800p takeover by rival Parker-Hannifin Corp.

Meggitt publishes documents for Parker-Hannifin takeover even though TransDigm still in the running

CLEVELAND--(BUSINESS WIRE)--Customer Support Operations honored for teamwork between Parker Aerospace's global OEM division and Parker Aerospace China

Parker Aerospace Named Supplier of the Year by Commercial Aircraft Corporation of China for Support of COMAC's ARJ21 Aircraft

CLEVELAND, Aug. 13, 2021 (GLOBE NEWSWIRE) -- Parker Hannifin Corporation (NYSE:PH), the global leader in motion and control technologies, today announced that Lee C. Banks, currently President and Chief Operating Officer, has been elected by the Board of Directors to a new role as Vice Chairman and President. The Board also has elected Jennifer A. Parmentier, currently Vice President and President - Motion Systems Group, to the role of Chief Operating Officer, reporting to Banks.  Berend Bracht, currently Vice President of Operations - Engineered Materials Group, has been elected to succeed Parmentier as Vice President and President - Motion Systems Group.

Parker Announces Executive Leadership Changes - Lee Banks Becomes Vice Chairman and President, Jenny Parmentier Becomes Chief Operating Officer, Berend Bracht Becomes Vice President and President - Motion Systems Group

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Parker-Hannifin Corporation (PH) CEO Tom Williams on Q4 2021 Results - Earnings Call Transcript

Parker-Hannifin's (PH) fiscal fourth-quarter revenues increase 25% year over year on account of impressive performance across its segments.

Parker-Hannifin (PH) Q4 Earnings & Revenues Beat Estimates

Parker-Hannifin Corp (NYSE: PH) reported fourth-quarter sales growth of 25.3% year-over-year to $3.96 billion and +22% on an organic basis, beating the consensus of $3.93 billion. Segment Sales: Diversified Industrial $1.82 billion (+27% Y/Y) and Aerospace Systems $630 million (+1% Y/Y).

Parker-Hannifin FY22 EPS Outlook Trails Consensus After Beating On Q4 Earnings

Parker Hannifin Corp. reported Thursday fiscal fourth-quarter record profit and revenue that beat Wall Street's expectations, as international industrial sales beat forecasts to offset a miss in North America sales. The motion control and technologies and systems company also provided a fiscal 2022 earnings outlook that was a little below expectations.

Parker Hannifin tops profit and sales expectations, but provides downbeat outlook; stock falls

CLEVELAND, Aug. 05, 2021 (GLOBE NEWSWIRE) -- Parker Hannifin Corporation (NYSE: PH), the global leader in motion and control technologies, today reported results for the fiscal 2021 fourth quarter and full year ended June 30, 2021. Fiscal 2021 fourth quarter sales were an all-time quarterly record at $3.96 billion, an increase of 25% compared with $3.16 billion in the fourth quarter of fiscal 2020. Net income was also a record at $504.8 million, an increase of 74% compared with $289.5 million in the prior year quarter. Fiscal 2021 fourth quarter earnings per share were also an all-time quarterly record at $3.84, an increase of 72% compared with $2.23 in the fourth quarter of fiscal 2020. Adjusted earnings per share increased 46% to $4.38 compared with adjusted earnings per share of $2.99 in the prior year quarter. A reconciliation of non-GAAP measures is included in the financial tables of this press release.

Parker Reports Fiscal 2021 Fourth Quarter and Full Year Results and Issues Guidance for Fiscal 2022

Parker-Hannifin Corporation (PH) is seeing favorable earnings estimate revision activity and has a positive Zacks Earnings ESP heading into earnings season.

Should You Buy Parker-Hannifin Corporation (PH) Ahead of Earnings?

Parker-Hannifin's (PH) fiscal Q4 earnings are likely to have gained from end-market strength, acquired assets and cost-control actions. Pandemic-led weakness across some end markets might have hurt.

Parker-Hannifin (PH) to Post Q4 Earnings: Is a Beat in the Cards?

Although doubts have been raised over other private equity takeovers of UK defence companies, Parker Hannifin Corp's £6.3bn offer for Meggitt PLC is likely to succeed, says Berenberg.  The 800p per share agreed cash offer for Meggitt is "clearly attractive" at a 71% premium, the investment bank said in a note to clients on Tuesday, adding that they "expect the deal to complete because it is a relatively simple (cash) structure and is unlikely to encounter competition issues".

Meggitt takeover by Parker Hannifin will face delays but is likely to succeed, says broker

Parker-Hannifin Corp (NYSE: PH) announced it is buying Meggitt for £6.3 billion. These are the details.

Why Parker-Hannifin (PH) Is Buying Meggitt For £6.3 Billion

Parker-Hannifin Corp (NYSE: PH) has agreed on the terms of a recommended cash acquisition of Meggitt PLC (OTC: MEGGF), a global leader in aerospace and defense motion and control technologies. The transaction consideration to be 800 pence in cash per Meggitt share, valuing Meggitt at ~£6.3 billion on a fully diluted basis, which is ~70.5% premium to Meggitt's share price on July 30.

Parker-Hannifin To Acquire Meggitt For ~£6.3B

U.S. industrial company Parker-Hannifin has agreed a £6.3 billion ($8.8 billion) deal to buy British defense and aerospace company Meggitt, the companies announced Monday.

Defense firm Meggitt's shares skyrocket on sale to U.S. giant Parker-Hannifin

CLEVELAND, Aug. 02, 2021 (GLOBE NEWSWIRE) -- Parker Hannifin Corporation (NYSE: PH), the global leader in motion and control technologies, today announced that it has reached an agreement on the terms of a recommended cash acquisition of the entire issued and to be issued ordinary share capital of Meggitt (the “Acquisition”), a global leader in aerospace and defense motion and control technologies.

Parker Announces Recommended All Cash Acquisition of Meggitt PLC

Meggitt plc has recommended a £6.3bn takeover offer agreed with US firm Parker-Hannifin Corporation. Corresponding to 800p per share, it represents a premium of 70.5% to Friday's closing price.

Meggitt agrees £6.3bn takeover offer with Parker-Hannifin Corporation

Meggitt agrees to $8.76 billion takeover by Parker-Hannifin

News for Parker-Hannifin Stock (PH)