Although Parker-Hannifin (currently trading at $975.61 per share) has gained 7% over the last six months, it has trailed the S&P 500’s 16.8% return during that period. This may have investors wondering how to approach the situation.
Find out in our full research report, it’s free.
Why Does Parker-Hannifin Spark Debate?
Founded in 1917, Parker Hannifin (NYSE:PH) is a manufacturer of motion and control systems for a wide variety of mobile, industrial and aerospace markets.
Two Things to Like:
1. Operating Margin Reveals a Well-Run Organization
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses — everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Parker-Hannifin has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 19.1%. This result isn’t too surprising as its gross margin gives it a favorable starting point.
2. Excellent Free Cash Flow Margin Boosts Reinvestment Potential
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Parker-Hannifin has shown terrific cash profitability, putting it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the industrials sector, averaging 15.6% over the last five years.
One Reason to Be Careful:
Slow Organic Growth Suggests Waning Demand In Core Business
In addition to reported revenue, organic revenue is a useful data point for analyzing Gas and Liquid Handling companies. This metric gives visibility into Parker-Hannifin’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Parker-Hannifin’s organic revenue averaged 3.8% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations. 
Final Judgment
Parker-Hannifin’s merits more than compensate for its flaws. With its shares underperforming the market lately, the stock trades at 27.4× forward P/E (or $975.61 per share). Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.
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