Today we have a moderately speculative idea.: take on industrial product manufacturer Parker-Hannifin (NYSE: PH), in order to make money on a conjuncture favorable for the company's business.
Growth potential and validity: 15,5% behind 15 months excluding dividends; 11% per year for 15 years including dividends.
Why stocks can go up: soon robots will take over everything, and companies will invest in equipment upgrades.
How do we act: we take shares now by 289,9 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
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And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark: as with the investment idea as a whole, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
PH manufactures components and systems for the movement and control of equipment.
According to the company's annual report, its revenue is divided into the following segments.
Industry of North America — 47%. Control and motion systems for a wide variety of manufacturing companies. Segment operating margin — 18,67% from its proceeds.
International industry — 33%. Control and motion systems for a wide variety of manufacturing companies for other regions, except North America. Segment operating margin — 18,69% from its proceeds.
Percentage revenue of two segments by product type:
- Motion Control - 25,7%. Batteries, coolers, cylinders.
- Fluid Control - 34,34%. Valves, Filters.
- Products for filtration and engineering materials - 39,96%.
Aerospace — 20%. Components for civil and military customers. Segment operating margin — 16,87% from its proceeds.
The company's clients come from a variety of industries.
Revenue by country and region:
- North America - 63%.
- The rest of the world - 37%. Europe gives 20% proceeds, Asian-Pacific area - 15%, Latin America — 2%.
There is no breakdown by country in the report. Only known, that the United States is the only country, giving more 10% proceeds.
Arguments in favor of the company
Spending current and future. PH is the same beneficiary of industrial growth in the US and the world, как TE Connectivity, Amphenol and other companies from our industry ideas. PH will play into the hands of the current demand for its products, and the future wave of orders from factories and manufacturing enterprises, investing in the renewal of fixed assets.
You can also expect great results from the division of the company, dealing with traffic control: here you can hope for a shaft of orders for the same reasons, same as UiPath. The wave of industrial automation is coming, and such applied solutions, like PH, will be in great demand. By the way,, we have a similar idea for Emerson Electric - there was about the same set of arguments in favor of the company.
Diversification. According to the annual report, none of the company's clients gives it more 3% proceeds. It's good: the risks of losing one of the clients are leveled and at the same time the company has a strong negotiating position.
Price. The company does not have a very high P / E — 21,72. This distinguishes it from many other industrial enterprises., which have this figure one and a half times higher.
What can get in the way
Industrial sores. As known, astrologers announced 2021 year of inflation, so the company may suffer from rising raw material costs, logistics and labor. If there is a new large-scale quarantine, this will also have a negative impact on reporting.
Didn't take off. The aviation component of a company's business can drag down reporting: there is no reason to count, that commercial aviation demand will return to pre-pandemic levels in the coming years.
Accounting. The company pays 4,12 $ dividends per share per year - approximately 1,42% per annum. This is slightly more than the average dividend yield on S&P 500 and is unlikely to contribute to the growth of quotations. But it can contribute to their fall.
According to the latest report, at the company 11,297 billion dollars in arrears, out of which 3,096 billion needs to be repaid within a year. She doesn't have much money.: 733,1 million in accounts and 2,183 billion of counterparties' debts.
Soon PH's debt burden will get even heavier: company buys for 8,69 billion dollars of aircraft manufacturer Meggitt.
PH goes to dividends 475,1 million per year, approx. 27,14% from PH profit for the past 12 Months. Considering the huge debt of the company and its spending, dividends may well cut, which could lead to an exodus from these shares of dividend investors.
In the long run, a company's large debt can deter investors, taking into account the growth of rates and the rise in price of loans.
What's the bottom line?
Shares can be taken now by 289,9 $. And then there are two ways:
- wait, when stocks surpass all-time highs in 321 $, previously achieved in May, and will cost 335 $. Think, that we will reach this level in the next 15 Months;
- keep shares next 15 years, to see, how the company fully realizes itself as a supplier of components for the transformation of the economy towards automation. And at the same time will earn on the shaft of investments of the corporate sector in new equipment.
