Parker Hannifin Earnings: Set Up Strong for Remainder of Fiscal Year and Beyond

Following our review of narrow-moat-rated Parker Hannifin’s PH fiscal third-quarter results, nothing materially alters our fundamental long-term view. Parker paced slightly ahead of our expectations for revenue (1.5% variance) and adjusted EPS (about a 4% variance). However, the impact of the quarterly beat and its implications in management’s guidance was minimal on our valuation. We’ve raised our fair value estimate to $333 per share from $328, but that’s only due to the time value of money.

We still give Parker full credit for its long-term aspirations of mid-single-digit organic growth, adjusted segment operating margins of 25%, and free cash flow margins of about 16%. We model a 1% higher free cash flow margin by 2027, given the improvements we think the company’s Win Strategy 3.0 playbook could drive. The latest playbook has a variety of lean tools, but we’re most enthusiastic about the design simplification and supply chain sourcing initiatives.

During the quarter, revenue rose to $5.06 billion, up nearly 12% organically (nearly 24% on a reported basis), while adjusted segment operating margin expanded about 50 basis points to a record 23.2%. Revenue growth and margin expansion drove adjusted EPS to $5.93, a nearly 23% increase over last year’s third quarter. On top of that, Parker posted sequential improvements on all fronts, as we’ve come to expect. We like what we see, and we think management’s guidance undersells Parker’s potential in the fiscal fourth quarter. Consequently, we are modeling nearly 2% higher than the midpoint of the adjusted EPS guidance (or just over 1% higher than the top end of the range).