Despite an eye-popping 127% rise since the March lows of this year and having surpassed its pre-Covid peak of this year, at the current price of $222 per share, Parker-Hannifin Corporation stock (NYSE: PH) still has some upside left. Parker-Hannifin Corporation is a leading worldwide diversified manufacturer of motion and control technologies and systems, providing precision engineered solutions for a wide variety of mobile, industrial, and aerospace markets. Parker-Hannifin’s stock has rallied from $98 to $222 off the recent bottom compared to the S&P 500 which increased 53% during the same period. The stock was able to beat the broader market in the last 7 months as the gradual lifting of lockdowns is expected to boost demand from the aerospace and industrial customer base which was severely affected during the pandemic, while supply constraints will also ease. Also, the stimulus measures announced gave further fillip to the stock. Though the stock is currently 17% above its 2017 level and 54% over its 2018 level, we believe that a positive earnings outlook and consistent dividend payments will help the stock to reach $230 per share level in the near term. Our dashboard What Factors Drove 17% Change In Parker-Hannifin Stock Between 2017 And Now? provides the key numbers behind our thinking.
Though revenue declined by 4.2% from $14.3 billion in FY2018 to $13.7 billion in FY2020 (financial year ends in June), the company’s stock price saw a 7% rise between December 2017 and December 2019. This was mainly driven by improving profitability, with net income margins increasing from 7.4% in FY2018 to 8.8% in FY2020. On a per share basis, earnings increased from $7.98 in FY2018 to $9.39 in FY2020.
The P/E multiple dropped from 24x at the end of 2017 to 22x at the end of 2019. This was mainly because the rise in EPS was higher than the growth in the stock price. The multiple crashed following the outbreak of the coronavirus pandemic which led to a sudden fall in demand from the company’s key markets. However, with the economies opening up, the P/E multiple has fully recovered and has in fact surpassed the 2019 level. The company currently trades at a P/E multiple of close to 24x. With customer demand expected to be back on track in the coming months, the company’s P/E multiple is likely to remain elevated at around 24x-25x levels.
What’s the Upside Trigger?
The coronavirus induced lockdown in various cities across the globe affected industrial and economic activity. This led to a drop in the demand for Parker-Hannifin’s products from its key customer bases – Aerospace and Industrials. The company experienced mandatory and voluntary facility closures in certain jurisdictions of operation. Additionally, the pandemic also affected the company’s supply chain network. This was reflected in the recently released FY2020 results (ending June 2020), where PH’s revenues declined 4.3% y-o-y. The fourth quarter of FY2020 (3 months ending June 30, 2020), which saw the most impact of the crisis, reported 14% y-o-y decline in revenues.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. The gradual lifting of lockdowns and easing of global supply bottlenecks is likely to help a large company like Parker-Hannifin which has a global supply chain network. Though demand from aerospace is expected to pick up at a lower pace, the company’s industrial segment, which contributed 80% of revenues, is likely to see a faster growth in demand in the coming quarters. Despite revenues projected to remain subdued in the coming year, lower supply impediments are expected to drive earnings growth in FY2021.
With continued growth in earnings, the P/E multiple is unlikely to see a major drop. In fact, we expect the multiple to remain elevated at the current level of 24x-25x. Along with earnings, another major factor driving the higher multiple is the shareholder return policy of the company. Parker-Hannifin has paid dividend for 280 consecutive quarters, including a yearly increase in dividends for the last 64 years. The current annual dividend rate is $3.52 per common share. Thus, higher earnings and consistent growth in shareholder returns will help the stock reach the $230 level in the near-term, higher from its current market price of $222.
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