Author Topic: PH - Parker-Hannifin Corp.  (Read 9539 times)

Palantir

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PH - Parker-Hannifin Corp.
« on: September 12, 2012, 09:10:13 AM »
Business Overview

Parker-Hannifin is a manufacturer, distributor, and retailer of industrial goods involved in the motion and control of fluids. This includes an array of different products, including but not limited to pipes, tubes, pumps, filters, and hydraulics. We can think of Parker as a maker of goods used to move fluids, which can be used in a wide range of industries, including but not limited to manufacture of chemicals, food and drink, oil and gas, and the operation of airlines, in addition to a diverse range of firms that use hydraulic products.

Edge

Parkerís competitive advantage or ďeconomic moatĒ is its distribution and retail system. It operates 3,000 stores globally, many of which are open 24 hours a day and 365 days a year. The result of this wide distribution and retail network is that stores always have parts on stock. If a factory suffers a product break, it needs to be replaced immediately, so the firm can neither afford to wait for parts to be shipped, nor is it very price sensitive. However, with Parker stores, one can walk into a store and be assured that the desired part will be in stock. This well developed network also allows Parker to quickly integrate a new product or acquisition into the business.

This competitive advantage makes more sense when we look at the nature of its competition. Parkerís products operate in markets with many competitors. However, there is no single firm that competes with Parker across the broad range of its business and array of products. So its tubes, filters, and hydraulics might be in competitive markets, however no firm will compete against Parker in all of them at once. Thus Parker can put many different product lines in one convenient location, which is very difficult for competitors to replicate as they may not be in many of these industries.

Financial Statements

Parkerís sales growth has been strong and stable over the past decade, and grew at slightly more than 7% annualized. Gross profit, however, grew at nearly 12% annualized over the same period. Using a longer time frame of twelve years, in order to account for an uncharacteristic drop in income in 2001, we see that net income has grown at nearly 10% annualized over the past twelve years. With growth rates in the range of 7-10% annually, it appears to be a firm with moderately strong and healthy growth rates.

In addition Income statement growth, gross, operating, and net margins have all grown over the past ten years, the only decline being during the recession, which is expected due to the lower sales and similar fixed costs at that point. Growing margins are very important as they indicate the growing ability to pass on costs to customers and are indicative of pricing power and an economic moat showing the business is strengthening over time.

One metric of firm performance are the efficiency ratios of Return on Equity (RoE) and Return on Assets, (RoA). Conventionally we use these to determine how efficiently a firm is using its assets, but more importantly, they show how a firm is reinvesting its capital and are a verdict of managementís ability to reinvest money back into the business. In the case of Parker-Hannifin, both RoA and RoE have not only been strong, they have been growing strongly over the past ten years.

As noted earlier, Parker is both a manufacturer as well as a retailer, hence, analyzing its inventory management capabilities is necessary as well. A firm that manages inventory well is one that carries enough inventory to meet needs without any excess on hand. So we look at the Inventory Turn-Days Ratio, ITD. The number of days has consistently declined over the past ten years, indicative of a firm that is managing inventory well, and thus, can keep a smaller amount of inventory on hand to meet sales obligations.

Using Average Payment Period to estimate the time taken to pay suppliers, we see an increase from 30 at the beginning of the decade to approximately 45.  This increase can be both strength and a weakness. It is a weakness as it would appear that the firm is not able to meet its payments. However, as Parker is operationally sound, rather than weakness, the growing payment period indicates that Parker is choosing to pay its suppliers more slowly, indicating strength. In the language of Porterís Five Forces, Parker appears to have resisted against the Bargaining Power of Suppliers, and as a result we see that the firm is strengthening its position in the industry, both among customers as demonstrated by rising margins, and against suppliers, as demonstrated by APP.

My estimate of Intrinsic Value is more than 50% higher than what the stock is trading at currently, I estimate IV to be: 155. I believe it is a firm that has a durable competitive advantage of a respected name and a strong distribution network, and it makes critical components for industry.
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FrankArabia

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Re: PH - Parker-Hannifin Corp.
« Reply #1 on: September 12, 2012, 09:20:40 AM »
Good write up Palantir!

bmichaud

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Re: PH - Parker-Hannifin Corp.
« Reply #2 on: September 12, 2012, 09:21:10 AM »
Love this company and their focus on buying back stock - I actually just reviewed it last week and came up to about $109. On page 7 of the 4Q12 conference call the CEO indicates he believes it's worth $105 - "....we look at Parker stock like we do any other investment where you'd do a DCF. And we start at the full value being $105....".

Palantir

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Re: PH - Parker-Hannifin Corp.
« Reply #3 on: September 12, 2012, 11:43:54 AM »
Could you elaborate a little bit on 107? That seems pretty low....given that their CFO has been historically greater than NI...
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bmichaud

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Re: PH - Parker-Hannifin Corp.
« Reply #4 on: September 12, 2012, 11:59:37 AM »
Could you elaborate a little bit on 107? That seems pretty low....given that their CFO has been historically greater than NI...

I tried to smooth out their earnings given it is relatively cyclical, so I may be overly conservative....

1. 2007-2012 average total asset turnover was 1.16X - FYE 2012 total assets were 11,170, so "normal" sales are 12,957.
2. 2007-2012 average net profit margin (I use net income as a proxy for free cash flow to equity) was 7.22% - 7.22% times "normal" sales is 936MM.
3. Shares out are about 150MM, so EPS (again, a proxy for FCF to equity per share) is approximately $6.24.
4. Given returns on equity north of 20%, I give it a 17.5X fair value PE - so FV per share approximately $109

FrankArabia

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Re: PH - Parker-Hannifin Corp.
« Reply #5 on: September 12, 2012, 12:18:15 PM »
10 year average ROE is ~15%. extremely decent.

Palantir

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Re: PH - Parker-Hannifin Corp.
« Reply #6 on: September 12, 2012, 12:41:54 PM »
Could you elaborate a little bit on 107? That seems pretty low....given that their CFO has been historically greater than NI...

I tried to smooth out their earnings given it is relatively cyclical, so I may be overly conservative....

1. 2007-2012 average total asset turnover was 1.16X - FYE 2012 total assets were 11,170, so "normal" sales are 12,957.
2. 2007-2012 average net profit margin (I use net income as a proxy for free cash flow to equity) was 7.22% - 7.22% times "normal" sales is 936MM.
3. Shares out are about 150MM, so EPS (again, a proxy for FCF to equity per share) is approximately $6.24.
4. Given returns on equity north of 20%, I give it a 17.5X fair value PE - so FV per share approximately $109

Thanks for your response, I think the discrepancy is primarily due to me simply using a higher income figure and higher multiple, mostly because I replaced Income with CFO which has been higher....hmm definitely will have to review assumptions.....I used a fairly conservative growth rate in valuation...but it was too simple of a model I suppose...
« Last Edit: September 12, 2012, 12:43:34 PM by Palantir »
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boilermaker75

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Re: PH - Parker-Hannifin Corp.
« Reply #7 on: October 19, 2012, 05:16:22 AM »
PH earnings came out this morning,

http://www.reuters.com/article/2012/10/19/parkerhannifin-brief-idUSWEN792320121019?feedType=RSS&feedName=marketsNews&rpc=43

and the stock is down 7% in pre-market trading.

Buying opportunity?

Palantir

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Re: PH - Parker-Hannifin Corp.
« Reply #8 on: October 19, 2012, 07:42:30 AM »
PH earnings came out this morning,

http://www.reuters.com/article/2012/10/19/parkerhannifin-brief-idUSWEN792320121019?feedType=RSS&feedName=marketsNews&rpc=43

and the stock is down 7% in pre-market trading.

Buying opportunity?

That was brutal. Earnings this quarter were indeed disappointing. But I feel that their long term prospects have not changed one bit. They are still the dominant provider in their sector, have a huge distribution chain, and can comfortably grow market share via acquisitions. I won't be adding to my position right now because it is already 10% of my portfolio, but when I add money to my account next year, I will consider it then.

My portfolio has gotten raped last few days. GOOG, MSFT, PH...
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FrankArabia

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Re: PH - Parker-Hannifin Corp.
« Reply #9 on: October 19, 2012, 09:26:20 AM »
just touched inappropriately....i know the feeling...though GOOG shouldn't be considered raped by any sense...the thing was up quite nicely over the quarter....you can't expect to bag kim/kourtney/khloe all in the same night