Parker-Hannifin: Strong Growth In Aerospace Systems, But Valuation Concerns, Downgrade To 'Sell'

seekingalpha11-19

I am downgrading Parker-Hannifin to a 'Sell' rating at a fair value of $563 per share due to overvaluation.The divestiture of the North America Composites and Fuel Containment division allows Parker-...

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overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nParker-Hannifin: Strong Growth In Aerospace Systems, But Valuation Concerns, Downgrade To 'Sell'\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-11-19 11:14 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4738523-parker-hannifin-stock-strong-growth-in-aerospace-systems-downgrade-to-sell-due-to-valuation><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>I am downgrading Parker-Hannifin to a 'Sell' rating at a fair value of $563 per share due to overvaluation.The divestiture of the North America Composites and Fuel Containment division allows Parker-...</p>\n\n<a href=\"https://seekingalpha.com/article/4738523-parker-hannifin-stock-strong-growth-in-aerospace-systems-downgrade-to-sell-due-to-valuation\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"PH","symbol_name":"汉尼汾","start_time":0,"source_url":"https://seekingalpha.com/article/4738523-parker-hannifin-stock-strong-growth-in-aerospace-systems-downgrade-to-sell-due-to-valuation","article_id":"2484968108","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/127544292/image_127544292.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2484968108","pubTimestamp":1731986067,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"I am downgrading Parker-Hannifin to a 'Sell' rating at a fair value of $563 per share due to overvaluation.The divestiture of the North America Composites and Fuel Containment division allows Parker-H","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":["rate"],"viewcount":null,"language":"en","relate_stocks":{"PH":"汉尼汾"},"translate_title":"派克汉尼汾：航空航天系统增长强劲，但估值担忧，评级下调至“卖出”","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"PH":0.9},"content_text":"I am downgrading Parker-Hannifin to a 'Sell' rating at a fair value of $563 per share due to overvaluation.The divestiture of the North America Composites and Fuel Containment division allows Parker-Hannifin to focus on core motion and control markets.Strong growth in Aerospace Systems contrasts with ongoing weakness in transportation, off-highway, and energy sectors, creating an uncertain near-term outlook.Despite a robust balance sheet and potential share repurchases, the current stock price is trading at a high multiple for an industrial company.   Monty Rakusen/DigitalVision via Getty Images  In my previous ‘Hold’ rating on Parker-Hannifin (NYSE:PH) in February 2024, I discussed their leading position in the motion and control markets. Parker-Hannifin completed its previously announced divestiture of North America Composites and Fuel Containment division in November 2024. While this move allows the company to focus more on its core motion and control markets, I believe their stock price is overvalued. Therefore, I am downgrading to a ‘Sell’ rating at a fair value of $563 per share. Divestiture of North America Composites & Fuel Containment Division On November 4th, Parker-Hannifin completed its previously announced divestiture of North America Composites and Fuel Containment (CFC) division. The CFC division operated six manufacturing facilities in US and Mexico, generating annual sales of approximately $350 million. As discussed in my previous article, Parker-Hannifin has been highly active in their portfolio management, acquiring growth companies and divesting non-core assets. I think the divestiture of the CFC division could enable the company will allow the company to allocate more resources to its core motion and control business lines in the North America market. In addition, the company used the proceeds on divestitures to further reduce their debts. Parker-Hannifin exited their Q1 FY25 with a net debt leverage of 1.9x. The debt reduction helped the company sustain a robust balance sheet. Strong Growth in Aerospace Systems But Weak Industrial Transportation The company released its Q1 FY25 result on October 31st, reporting 1.4% organic revenue growth and 4.3% adjusted net income growth, as shown in the chart below.   Parker-Hannifin Quarterly Results During the earnings call, the management highlighted that the Aerospace Systems segment drove the business growth for the quarter. Notably, the segment’s revenue grew 17% organically with double-digit growth in both commercial and defense markets. It’s worth noting that aftermarket accounts for half of the segment revenue, where Parker-Hannifin maintains a very strong market position. Due to the strong performance, the company raised the full-year revenue guidance for Aerospace Systems to 10% for FY25, up from the initial 8.5% guidance. Parker-Hannifin sells highly engineered, differentiated airframe and engine components and systems, serving OEMs in the commercial aerospace and defense markets. The strong order and revenue growth underscore a very strong market demands in both commercial and defense markets. According to the latest IATA report, the revenue passenger kilometers (RPK) increased by 7.1% year-on-year in September 2024, with total capacity up 5.8% year-over-year. The strong global passenger demand will continue to support a robust commercial aerospace market, in my view. In addition, the management noted ongoing weakness in North America in the transportation, off-highway, and energy sectors. The current macroeconomic environment has created challenges for these specific sectors. While the management indicated that they had observed early signs of recovery, the timing of a full recovery remains uncertain. Outlook and Valuation As detailed in the table below, Parker-Hannifin is guiding for organic revenue growth of 1.5%-4.5% and 80bps of margin expansion for FY25. This is a relatively wide revenue guidance range, and I think it incorporates uncertainties in the transportation, off-highway and energy sectors.   Parker-Hannifin Investor Presentation For the near-term growth, I am considering the following factors:  I calculate the divestiture of their CFC division will reduce topline growth by approximately 1.5%, as the division generated around $350 million in revenue. During the earnings call, the management noted that the company will benefit from around 20bps of margin expansion due to these divestitures. Aerospace Systems segment represents more than 27% of total revenue. Parker-Hannifin holds strong market position in their airframe and engine business, with a stable revenue stream from aftermarket. I anticipate the segment revenue will grow by 10% annually, driven by 6% growth from OEMs in both defense and commercial markets, and 4% growth from aftermarket. Diversified Industrial -North America: due to the divestiture, Parker-Hannifin is able to focus more on their core motion and control markets. The segment growth is largely tied to the overall industrial production growth. As the Fed has begun to cut interest rates, I anticipate the economy will start to normalize. As such, I project the segment will grow by 4% annually, driven by 2% price growth and 2% volume growth. Diversified Industrial – International: I forecast the segment will grow by 4%, aligned with the historical average.  Adding together, the total organic revenue growth is forecasted to be 5%. In addition, I assume the company will allocate 5% of revenue toward M&A, contributing 1.3% growth to the topline. I continue to forecast 20bps annual margin expansion, driven by 10bps from gross profits and 10bps from reduction in SG&A expenses. For FY25, I added an addition 20bps of margin expansion due to the divestitures. The WACC is calculated to be 11% assuming: risk-free rate 3.6%; beta 1.18; equity risk premium 7%; cost of debt 5%; equity $89 billion; debt $10 billion; tax rate 22.5%. The DCF can be summarized as follows:   Parker-Hannifin DCF Discounting all the free cash flow, the fair value is calculated to be $563 per share, as per my estimates. The current stock price is trading at more than 27x FY25’s free cash flow, which, in my view, is a relatively high multiple for an industrial company. Upside Risks As I assign a ‘Sell’ rating, I am considering the potential upsides for their stock price. Parker-Hannifin repurchased $332 million of own shares in FY24, and $92 million in Q1 FY25. Given the company’s robust balance sheet, they might authorize more share repurchase programs in the future. In addition, the company has 20% of revenue exposure in the in-plant industrial market, and the management anticipates the segment will decline by low-single-digit in FY25, reflecting the project delays and lower capital expenditures in the general industrial markets. However, as the inflation starts to cool, the recovery of industrial production might occur faster than the market expects.   Parker-Hannifin Investor Presentation Conclusion  Parker-Hannifin holds a strong market position in the Aerospace Systems segment across both commercial and defense end-markets. However, I think the stock price is overvalued; thus, I am downgrading to a ‘Sell’ rating at a fair value of $563 per share.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2484968108"}