Parker Earnings: Superb Aerospace Momentum Prompts Us to Raise Fair Value by 7%

Parker Hannifin PH put forth a stellar fiscal first-quarter earnings report. The narrow-moat-rated firm crushed both our prior sales and earnings estimates. Consequently, we raise our fair value estimate by 7% to $411. That said, the stock still doesn’t strike us as a bargain.

First-quarter revenue rose 14.5% year on year or 2% on an organic basis, while adjusted segment operating margins rose 220 basis points to 24.9%. Unsurprisingly, as we’ve seen across the multi-industrial category, aerospace was the driver of performance. In fact, sales rose a resounding 16% year on year (or 65% year on year when including the Meggitt acquisition). This is the last quarter before Meggitt flows through to organic results. Given strong volume leverage, aerospace also drove increased adjusted segment operating margins, improving this figure by 610 basis points to 26.0%.

Parker has done a good job of shifting the portfolio to longer-cycle businesses with higher aftermarket-associated revenue, as it previously signaled. The acquisitions of Clarcor, Lord, Exotic, and Meggitt have reduced some of the company’s cyclicality associated with legacy Parker. The long-cycled nature of Parker’s refreshed portfolio has also helped the company’s backlog coverage (since 2016) double to the mid-50s. In turn, this has helped with increased visibility. In concert with Parker’s Win Strategy (its nomenclature for its lean toolkit like design simplification and other initiatives), this has helped Parker drive continued margin expansion. Parker’s headway with its initiatives and Meggitt integration convince us it will readily hit its 25% adjusted segment operating margin by 2027.

Finally, Parker announced the retirement of Vice Chair and President Lee Banks, effective Dec. 31. This is a huge loss for Parker given Banks’ role in helping develop the Win Strategy and its various iterations.