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Parker-Hannifin Shares Up 39.2% Year to Date: Here's Why

Zacks Equity Research

Shares of Parker-Hannifin Corporation PH have rallied 39.2% so far this year, outperforming its industry’s rise of 35.5%.

The Zacks Rank #3 (Hold) stock, which has a market cap of roughly $27 billion, has impressed investors with its recent earnings streak. It surpassed estimates in each of the four trailing quarters, the average positive surprise being 5.29%.

Let’s analyze the reasons behind the company’s impressive price performance and find out if there is room for further appreciation.

What’s Aiding the Stock?

Over time, Parker-Hannifin has solidified the product portfolio and leveraged business opportunities through acquisition of assets. In this regard, the company completed the buyout of Exotic Metals Forming Company in September 2019. Exotic Metals’ unique products and proprietary manufacturing capabilities have been enhancing Parker-Hannifin’s aerospace products and solutions. In first-quarter fiscal 2020 (ended September 2019), this buyout had a positive contribution of 3.7% to sales of the Aerospace segment. Also, the company’s CLARCOR acquisition (completed in 2017) is likely to bring in synergy savings worth roughly $160 million in fiscal 2020 (ending June 2020).

Also, strengthening OEM business, particularly in military end markets, along with growth in commercial aftermarket will continue supporting its top line in the quarters ahead. In addition, benefits of its unique Win Strategy and ongoing investments are expected to support the company's revenue growth.

Moreover, Parker-Hannifin is steadily improving its cash position. In the last five fiscal years (2015-2019), the company’s cash flow from operations increased 5.9% (CAGR). In addition, it increased the quarterly dividend rate by 16% or 12 cents per share to 88 cents in April 2019. On an annualized basis, the dividend increased to $3.52 from $3.04 per share.

Trend in Estimate Revisions

The Zacks Consensus Estimate for fiscal 2020 earnings for Parker-Hannifin has climbed nearly 0.6% over the past 30 days from $10.69 to $10.75. For the fiscal year, two estimates have been revised upward in the past month against one downward.

However, a highly leveraged balance sheet is a concern for Parker-Hannifin. The company had long-term debt of $7,366.9 million at the end of first-quarter fiscal 2020, reflecting 70.8% increase on a year-over-year basis. Also, net interest expenses in the quarter were about $70 million, up 58%.

Stocks to Consider

Some better-ranked stocks from the same space are Kaman Corporation KAMN, Barnes Group, Inc. B and DXP Enterprises, Inc. DXPE. While Kaman sports a Zacks Rank #1 (Strong Buy), Barnes Group and DXP Enterprises carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Kaman pulled off average positive surprise of 7.72% in the last four quarters.

Barnes Group pulled off average positive surprise of 4.21% in the last four quarters.
 
DXP Enterprises’ average positive earnings surprise in the last four quarters was 17.67%.

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