Why Is Parker-Hannifin Stock Going Up?

Parker-Hannifin (NYSE:PH) had an extraordinary year, up 37% before the final quarter of the year kicked off in earnest.

This leading diversified industrial company specializes in aerospace and defense, two industries that have been winning favor among investors. As such, it’s no big surprise to see that the stock has delivered over 200% over the past five years, padding investors’ pockets.

And while the stock has been a runaway success this year, analysts forecast even more upside over the next 12 months, so is it time to buy?

Why Is Parker-Hannifin Stock Going Up?

Parker Hannifin stock has been going up because of strong earnings of $6.10 per share that has eclipsed analysts’ expectations of $5.48 per share.

To stimulate growth, management has been highly acquisitive. For example, an important acquisition was Meggitt PLC in 2022, which has a broadly diversified aerospace/defense profile with technologies that are slated to greatly improve Parker Hannifin’s capabilities.

A few years prior in October 2019, the company entered into an agreement and acquired LORD Corporation, a technology and manufacturing company that produces adhesives, coatings, and motion management devices. That purchase expanded Hannafin’s materials science portfolio and secured its position in key sectors, including aerospace and automobile manufacturing.

Another important deal that was made in 2019 was the acquisition of Exotic Metals Forming Company, LLC. The company is widely recognized for its substantial background in engineering and manufacturing of high-temperature and high-strength metal parts used in the aerospace industry and other fields that contribute to Parker’s plans to venture into new growth markets.

What Else Is Supporting Parker Hannafin’s Growth?

Besides adding these enterprises to its corporate umbrella, Parker Hannifin has also continued to strengthen its capabilities in digital and IoT technologies.

Currently, the company is focusing on improving its digital offerings in order to produce better-connected solutions. The digital transformation is ultimately intended to create more value-added solutions for customers.

As evidence of its progress in this area, Parker Hannifin partnered with Kaon Interactive to improve customer engagement strategy using Kaon’s digital interactive technology.

Will Parker’s “Win Strategy” Be Victorious?

During the 2024 investor meeting, management outlined the company’s ongoing transformation process, new growth opportunities associated with secular trends, and The Win Strategy to grow and expand margins.

The Win Strategy 3.0 is Parker’s business system, which outlines key objectives and undertakings for business growth, change, and performance.

Its Win Strategy has four overarching goals that include:

• Engaged People,
• Customer Experience,
• Profitable Growth, and
• Financial Performance.

While acquisitions have been successful, management is keen to drive organic sales growth too. The company also introduced new and raised five-year financial targets for the fiscal year 2029, aiming for 4-6% organic sales growth CAGR, 27% adjusted segment operating margin, 28% adjusted EBITDA margin, 17% free cash flow margin, and over 10% adjusted EPS CAGR.

And it’s benefitting from favorable tailwinds and growth trends in aerospace, digitalization, electrification, clean technologies, and infrastructure spending to hit these goals.

So too increased government spending on manufacturing industries and infrastructure is likely to result in strong growth. Programs like the U.S. Infrastructure Investment and Jobs Act extend essential infrastructures, which are key arenas for Parker-Hannifin.

Parker Hannifin Is Beating The Street

Last quarter, sales came in at $5.18 billion a year-over-year increase of 1.8%. Net income was $785 million, up from $709 million a year prior. Those numbers beat the street and sparked a sustained share price rally.

Also it’s worth pointing out the solid dividend policy, which underlines its sound financial standing and focuses on shareholders’ value.

The company has a record of 69 years of dividend increases. It has increased its dividend at 18.3% CAGR over the past three years. Parker pays an annual dividend of $6.52, which translates to a yield of 1.04%.

Given the 27% payout ratio, there is lots of room to increase that over time without burdening the balance sheet.

Is Parker-Hannifin a Buy Now?

Parker Hannifin is a strong buy in the eyes of analysts who have a consensus price target of $681 per share on it.

Relative to near-term earnings growth, the price-to-earnings multiple is fairly reasonable still. At first glance the 28.6x multiple appears lofty but against the backdrop of 10.6% net income growth over the next 5 years it’s quite reasonable. That’s further confirmed by the PEG of 0.79, well below the 1.0 threshold that would suggest fair value.

It shouldn’t be overlooked too that Parker Hannifin has maintained dividends for a full 54 years so the stability of the payout will appeal to long-term income-oriented investors.

Generating almost $20 billion annually and dropping nearly $3 billion of that to the bottom line, there is lots to like about Parker Hannifin. And so, while it’s gone on a run, and ideally a pullback would be preferred, the reality is this stock has the hallmarks of doing well over the medium to long-term for investors willing to ride the ups and downs.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.