As of August 3, 2023, Parker Hannifin Corp (PH, Financial) experienced a daily gain of 3.4%, bringing its stock price to $419.67. With an Earnings Per Share (EPS) of 11.55, the question arises: is the stock modestly overvalued? In the following analysis, we delve into this question, offering a comprehensive evaluation of Parker Hannifin's value.
About Parker Hannifin Corp
Parker Hannifin Corp is a leading industrial conglomerate, operating two primary segments: diversified industrial and aerospace systems. The diversified industrial segment, boasting 15,500 independent distributors and generating about 40% of its business outside the United States, caters to a variety of end markets. The aerospace systems segment focuses on engine and actuation components. With a market cap of $53.8 billion and sales amounting to $18.2 billion, Parker Hannifin's current stock price seems to exceed its GF Value of $370.76, indicating a potential overvaluation.
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, calculated considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line denotes the stock's ideal fair trading value.
Parker Hannifin's stock appears to be modestly overvalued according to GuruFocus' valuation method. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. Conversely, if the share price is significantly below the GF Value calculation, the stock may be undervalued and have higher future returns. At its current price of $419.67 per share, Parker Hannifin stock appears to be modestly overvalued.
Given this overvaluation, the long-term return of Parker Hannifin's stock is likely to be lower than its business growth.
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Financial Strength of Parker Hannifin
Investing in companies with low financial strength could lead to permanent capital loss. Therefore, assessing a company's financial strength is crucial before deciding to buy shares. Parker Hannifin's cash-to-debt ratio of 0.04 ranks worse than 96.4% of companies in the Industrial Products industry, leading to a GuruFocus financial strength rank of 5 out of 10, suggesting a fair balance sheet.
Profitability and Growth of Parker Hannifin
Investing in profitable companies, especially those with consistent profitability over the long term, poses less risk. Parker Hannifin, with its high profitability rank of 8 out of 10, has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $18.2 billion and Earnings Per Share (EPS) of $11.55. Its operating margin is 15.89%, ranking better than 84.71% of companies in the Industrial Products industry.
However, growth is a crucial factor in a company's valuation. Parker Hannifin's 3-year average annual revenue growth of 3.8% ranks worse than 59.08% of companies in the Industrial Products industry. Its 3-year average EBITDA growth rate is -1.4%, ranking worse than 69.82% of companies in the same industry.
ROIC vs WACC
Profitability can also be evaluated by comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business, while WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. Parker Hannifin's ROIC is 9.73 while its WACC came in at 10.24.
Conclusion
In summary, Parker Hannifin's stock appears to be modestly overvalued. The company's financial condition is fair, and its profitability is strong. However, its growth ranks worse than 69.82% of companies in the Industrial Products industry. To learn more about Parker Hannifin stock, check out its 30-Year Financials here.
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