Parker Earnings: Results As Expected, but Long-Term Reassessment Means We Raise Our Fair Value 15%

After reviewing narrow-moat Parker Hannifin’s PH fiscal fourth quarter and full-year results, we lift our fair value estimate by 15% to $384. The primary driver of our strong raise stems from the additional year of revenue contribution following our annual model roll. The additional year has outsize benefits given our view Parker can maintain structurally better-operating margins as it continues implementing its Win Strategy 3.0. However, we also lifted our revenue assumptions in the outer years of our model following a reassessment of Parker’s end markets and its competitive position within those markets.

We specifically came out ahead relative to our prior forecast for Parker’s flow-and-process-control platform by over 1% in our 5-year compound annual growth assumption. This is mission-critical technology in an automation process that regulates the flow and pressure of liquid to regulate and prevent costly shutdowns. That said, we stay firmly within management’s consolidated long-term growth algorithm, and model around the midpoint of management’s long-term revenue targets. We also model at Parker’s operating and free cash flow margin targets (the latter figure exceeds management’s target by 1% relative to the 16% target).

While the fiscal fourth quarter was solid, we weren’t blown away either as revenue and adjusted operating margins were roughly in line with expectations. While we were off a bit on earnings, this was mostly due to outsize, one-time, and noncash benefits below the operating line (mostly noise related to the Meggitt transaction). Further, the revenue guide was a touch below what we hoped for, given Parker’s difficult comparison in fiscal 2023 (for context, prior to the fourth quarter Parker had recorded eight straight sequential quarters of double-digit organic revenue increases). Importantly, however, adjusted operating margins for all segments are right in line, meaning our adjusted EPS expectations are essentially unchanged for fiscal 2024.