Machinery Stocks

Parker-Hannifin Corp Valuation – July 2016 $PH

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – June 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Parker Hannifin Corp (PH) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Parker-Hannifin Corporation is a manufacturer of motion and control technologies and systems, providing precision engineered solutions for a wide variety of mobile, industrial and aerospace markets. The Company’s manufacturing, service, sales, distribution and administrative facilities are located in the United States and in 49 other countries. Its products are supplied to approximately 450,000 customers in manufacturing, transportation and processing industry. The Company has two reporting segments: Diversified Industrial Segment products are made to original equipment manufacturers and their replacement markets in manufacturing, packaging, processing, transportation, mobile construction, refrigeration and air conditioning, agricultural and military machinery and equipment industries, and Aerospace Systems Segment products are made in the commercial and military aerospace markets to both original equipment manufacturers and to end users for spares, maintenance, repair and overhaul.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of PH – July 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $15,306,433,202 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.18 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 46.03% Pass
6. Moderate PEmg Ratio PEmg < 20 17.67 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.09 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.18 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.90 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

PH value chart July 2016

EPSmg $6.44
MG Growth Estimate 2.11%
MG Value $81.86
Opinion Overvalued
MG Grade B+
MG Value based on 3% Growth $93.39
MG Value based on 0% Growth $54.75
Market Implied Growth Rate 4.59%
Current Price $113.82
% of Intrinsic Value 139.04%

Parker-Hannifin Corp qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the high PB ratio. The Enterprising Investor has no initial concerns. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $5.65 in 2012 to an estimated $6.44 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 4.59% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

Parker-Hannifin Corp performs fairly well in the ModernGraham grading system, scoring a B+.

Stage 3: Information for Further Research

PH charts July 2016

Net Current Asset Value (NCAV) -$11.64
Graham Number $68.74
PEmg 17.67
Current Ratio 2.18
PB Ratio 3.09
Current Dividend $2.52
Dividend Yield 2.21%
Number of Consecutive Years of Dividend Growth 20

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Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2016
Total Current Assets $5,456,839,000
Total Current Liabilities $2,500,619,000
Long-Term Debt $2,675,000,000
Total Assets $12,069,401,000
Intangible Assets $3,909,490,000
Total Liabilities $7,045,789,000
Shares Outstanding (Diluted Average) 136,553,000

Earnings Per Share History

Next Fiscal Year Estimate $5.63
Jun2015 $6.97
Jun2014 $6.87
Jun2013 $6.26
Jun2012 $7.45
Jun2011 $6.37
Jun2010 $3.40
Jun2009 $3.13
Jun2008 $5.53
Jun2007 $4.67
Jun2006 $3.71
Jun2005 $3.35
Jun2004 $1.94
Jun2003 $1.12
Jun2002 $0.75
Jun2001 $1.97
Jun2000 $2.21
Jun1999 $1.89
Jun1998 $1.90
Jun1997 $1.64
Jun1996 $1.44

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $6.44
Jun2015 $6.83
Jun2014 $6.53
Jun2013 $6.01
Jun2012 $5.65
Jun2011 $4.70
Jun2010 $3.94
Jun2009 $4.17
Jun2008 $4.41
Jun2007 $3.55
Jun2006 $2.72
Jun2005 $2.09
Jun2004 $1.50
Jun2003 $1.39
Jun2002 $1.59
Jun2001 $1.99
Jun2000 $1.93

Recommended Reading:

Other ModernGraham posts about the company

Parker Hannifin Corp Valuation – January 2016 Update $PH
Dividend Growth Stocks for the Intelligent Investor – November 2015
Dividend Growth Stocks for the Intelligent Investor – October 2015
15 Best Stocks For Value Investors This Week – 9/12/15
Dividend Growth Stocks for the Intelligent Investor – September 2015

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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