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

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Parker-Hannifin Corporation (PH - Free Report) has been benefiting from a strong demand environment for its products in the industrial end market. The company’s unique Win Strategy (version 3.0) and the recovery in the commercial aerospace end market are also likely to drive its performance in the quarters ahead. For fiscal 2022 (ending June 2022), it anticipates sales to grow in the range of 5-9% on a year-over-year basis, higher than 4.8% in fiscal 2021 (ended June 2021).

The company intends to strengthen and expand its businesses through acquisitions. Its agreement to acquire Meggitt plc (August 2021) is anticipated to enhance its motion & control technologies offerings in aerospace and defense end markets. In fiscal 2021, acquisitions had a positive contribution of $394.1 million to the company’s sales.

Parker-Hannifin’s policy of rewarding shareholders handsomely through dividend payments and share-buyback program will also work in its favor. In fiscal 2021, the company paid out dividends worth $475.2 million. It increased the quarterly dividend rate by 17% in April 2021. Also, in third-quarter fiscal 2021 (ended March 2021), the company reinstated its share-repurchase program, which it expects to continue in fiscal 2022.

The company’s focus on cost-control measures has also been aiding it to maintain a healthy capital structure. In fourth-quarter fiscal 2021 (ended June 2021), its adjusted operating margin increased 230 basis points on a year-over-year basis.

However, it has been experiencing escalating costs and operating expenses over time. In the fiscal fourth quarter, Parker-Hannifin’s cost of sales and selling, general & administrative expenses increased 19.7% and 17.3%, respectively on a year-over-year basis. For fiscal 2022, it expects to incur corporate general & administrative, interest, and other expenses of $480 million.

Its high-debt profile also poses a concern. Exiting fiscal 2021, its long-term debt was $6,582 million, up 0.2% on a sequential basis. Also, its interest expenses remained high at $250 million in the year.

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In the past three months, the Zacks Rank #3 (Hold) stock has appreciated 3% compared with the industry’s growth of 1.7%.

Key Picks

Some better-ranked stocks from the same space are Kadant Inc (KAI - Free Report) , Dover Corporation (DOV - Free Report) , and EnPro Industries, Inc. (NPO - Free Report) . While Kadant sports a Zacks Rank #1 (Strong Buy), Dover and EnPro Industries carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Kadant pulled off a trailing four-quarter earnings surprise of 22.26%, on average.

Dover pulled off a trailing four-quarter earnings surprise of 17.59%, on average.

EnPro Industries pulled off a trailing four-quarter earnings surprise of 80.64%, on average.

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