Moving Parts

Among the numerous global industries, there lies a critical sector responsible for propelling nearly everything that moves: the motion and control technologies industry. This arena, encompassing core elements from electromechanical systems to advanced filtration and aerospace components, is  influential in supporting multiple facets of modern life. While profitability within this segment is evident, given the sheer demand and diverse applications, there’s a nuance to achieving excellence.

Sound financial health, including robust returns on assets and equity, elevated profit margins, and the adeptness to manage high-value acquisitions, defines the elite in this sphere. As the global landscape changes and technologies evolve, the significance of motion and control will continue to soar.  Today, we are adding one such stalwart to the portfolio.

But first, let us delve into a short update on the economy and markets, and the Smart Investor calendar.


Economy and Markets: Looking Forward

There are several important reports scheduled to be published in the next few days.

  • Later today, we will receive the report on September’s Producer Price Index (PPI), which reflects input prices for producers and manufacturers. Since PPI measures the costs of producing consumer goods, which directly affects retail pricing, PPI is seen as a good pre-indicator of inflationary pressures, i.e., a leading indicator for the next months’ CPI. Thus, the PPI serves the policymakers in shaping their overall inflation outlook.
  • On Thursday, we will get the report on September’s Consumer Price Index (CPI), which measures the changes in the retail prices of goods and services over the previous month. It is one of the two key inflation measures (the second one is the Personal Consumption Expenditures, or PCE). Policymakers, businesses, and consumers closely watch the CPI report, as it reflects the price trends in the economy, shapes consumer spending and business outlooks, and directly affects the Federal Reserve’s policy rate decisions.
  • On Friday, we will receive the preliminary data on October’s Consumer Sentiment, reflecting the level of confidence the consumers feel towards the economy. This confidence affects consumer spending in the short term. Thus, the Index is used by economists, analysts, and policymakers as a leading indicator, helping to unveil the near-future trends in consumer demand, which directly affects economic growth.

As for the stock calendar, the Q2 2023 earnings season for Smart Investor Portfolio companies is finished, and we already are beginning to receive some Q3 2023 reports. The third quarter earnings report for UnitedHealth (UNH) is scheduled to be released on October 13th.

The ex-dividend date for Alamo Group (ALG) is on October 13th, as well.


Today, we are adding the stock of the world’s leading diversified manufacturer of motion and control technologies and systems. The company we are adding has been growing revenues, margins, and net earnings at a fast clip, and its long-term prospects are outstanding.

As opposed to our regular modus operandi, today we are not recommending selling a company from the Smart Investor portfolio. With the ongoing political instability and a sudden spike in global geopolitical imbalances, this week we choose the “wait and see” approach.


New Addition: Parker Hannifin Corp. (PH)

Parker Hannifin Corporation (aka Parker) is the world’s leading diversified manufacturer of motion and control technologies and systems, providing precision-engineered solutions for a wide variety of mobile, industrial and aerospace markets worldwide.

The company’s engineering expertise spans the core motion and control technologies – electromechanical, hydraulic and pneumatic, fluid and gas handling, filtration, engineered materials, climate control, process control and aerospace. Parker technologies can be found on and around almost everything that moves, as the company serves a wide range of industries, including aerospace, electronics & semiconductors, healthcare & life sciences, HVAC (heating, ventilation, and air conditioning) & refrigeration, industrial uses, machinery, oil & gas, transportation, power & renewables, and more.

Parker Hannifin was established in 1917 in Ohio as the Parker Appliance Company, which built pneumatic brake systems for buses, trucks and trains. The company expanded into aircraft system products in 1927. In 1957, the company purchased Hannifin, a producer of valve and cylinder products, and changed its name to Parker Hannifin. The united Parker Hannifin set a goal to make the company into “the General Electric of fluid power,” a goal it generally achieved in the coming decades. The company is one of the pillars of the U.S. industrial might and innovative strength; as such, it designed parts for the craft used in NASA’s first human moon landing in 1969.

Parker Hannifin joined the Fortune 500 list of the largest U.S. companies by revenue in 1964 and has been on that list ever since. Today, PH is one of the largest companies in the world in motion control technologies, commanding a market capitalization of $50.3 billion and a workforce of almost 63,000. The company, headquartered in Cleveland, Ohio, has operations in 45 countries across six continents. The company’s shares have been traded on the New York Stock Exchange (NYSE) since 1964.

PH dominates the fragmented Motion & Control market, estimated at $135 billion. With a 13% market share, Parker is the undisputed market leader in its sphere. Out of its total annual revenues of $19 billion, 23% are derived from its Aerospace Systems segment, 30% from Industrial International segment, and 47% from its Industrial North America segment. The vast breadth of the company’s core portfolio, spanning across hydraulics, pneumatics, electromechanical, filtration, fluid and gas handling, process control, and other technologies, sets a very high bar for its aspiring competitors. The technological excellence, coupled with operational efficiency and superb distribution strategy, make it into a cash-generation powerhouse.

The company’s strategy is centered on expanding its product portfolio and geographical presence, as well as reaching a 20% market share by 2027. PH is attending to these goals by investing heavily in organic expansion and R&D, as well as through acquisitions. The company has acquired more than 80 firms through the years in different U.S. states and 16 countries. The company’s recent notable purchases include two U.S. companies bought in 2019: Exotic Metals Forming Company, a producer of air and exhaust management solutions for aircraft and engines, and LORD Corporation, a leading manufacturer of advanced adhesives and coatings. In April 2022, PH made its largest acquisition in its history: it bought U.K.-headquartered Meggitt Plc, a leading provider of proprietary and differentiated aerospace & defense technologies, for almost $9 billion in cash. The acquisition of Meggitt nearly doubled the size of Parker’s Aerospace Systems segment.

Of course, cash acquisitions of this magnitude don’t come without a price: Parker has a high debt-to-equity ratio of 125%. However, the large amount of debt on PH’s balance sheet doesn’t present a problem for the company: debt is well-covered by operating cash flow, while interest payments on its debt are well-covered by EBIT. The costs of servicing the debt are low, since Parker is highly rated by the global credit rating agencies (“BBB+” at S&P Ratings and Fitch, “Baa1” at Moody’s), reflecting their view that risks associated with the company’s debt are low.

According to Fitch Ratings, “the rating reflects PH’s scale, market leading position in motion and control technology, diversified customer base and product range. It also reflects strong growth and tailwinds across multiple of PH’s longer cycle end-markets such as aerospace, evidenced by strong build-up of orderbook. Higher margin and free cash flow (FCF) support PH’s financial flexibility to fund bolt-on acquisitions and balanced returns to shareholders.”

Apart from the high levels of debt, Parker’s financial health is robust. While its high Return on Equity (ROE) of 21.7% is skewed by the debt, its Return on Assets (ROA) of 8.7% is much higher than the industry’s average. PH’s industry-beating profitability is also reflected in its operating margin of 23% and net profit margin of 12%, which are much higher than the average in its industry, as well as in its high return on invested capital (ROIC) of 11.5%.

In August, Parker Hannifin reported its financial results for its fiscal Q4 2023 and fiscal full-year 2023 (ended June 30, 2023). In FQ4, the company exceeded analysts’ revenue and EPS expectations, as it did in all quarters for which these expectations were published, without a single exception. The company reported a 22% year-over-year increase in revenues, considerably helped by the Meggitt acquisition and operational improvement, and an 18% jump in earnings-per-share. Out of the past 12 quarters, 11 saw a double-digit year-on-year growth in EPS. In FY 2023, the company’s revenues grew 20% to a record of $19.1 billion, operating margin expanded to a record 23%, and earnings-per-share increased 15% to a record of $21.55. On the back of these exceptional results, the management lifted its FY 2024 outlook.

Parker’s robust earnings and successful delivery have been reflected in the stock’s outperformance. PH’s stock has brought its investors an outsized gain of 84% in the past three years, compared to the S&P 500’s (SPX) increase of 26% and Industrial Select Sector SPDR Fund’s (XLI) 28%. In the past 12 months, the stock has rallied by 58%, while the SPX and XLI both gained 21%.

As a result, Parker’s stock is trading at higher valuations than the Industrials sector’s median. The stock is now trading at a TTM P/E of 24.6, representing about a 28% premium to the sector average, while its Forward P/E of 21 represents a 6% premium. However, when compared with peers in its industry, such as Ingersoll Rand (IR), Fortive (FTV), and Illinois Tool Works (ITW), Parker looks quite reasonably priced, about 7% below the peer average.

Notably, in addition to the stock price appreciation, Parker Hannifin rewards its shareholders through dividends. Although its current dividend yield of 1.4% is lower than the average for its sector, the company has been constantly increasing its cash payouts for 67 years, among the top-five longest-running dividend-payers in the U.S. Parker belongs to the Dividend Kings – a group of S&P 500 companies who have increased their dividends consecutively for above 50 years. Given the company’s great performance and its dividend history, investors can rest assured that it will continue to increase its dividends for the foreseeable future. This outlook is also supported by the company’s strategy that targets a 5-year average dividend payout of 30%-35% of net income.

In addition to dividends, the company performs buybacks under its various share-repurchase programs, running since 1990. The latest program, authorized in 2014, authorizes the management to buy back 35 million of the company’s shares. In FQ4 2023, Parker repurchased its stock in the amount of $50 million, bringing the total number of shares repurchased under the previous and current programs to over 27 million.

TipRanks-scored top analysts foresee an average upside of 14.8% for Parker Hannifin stock in the next 12 months. PH carries a “Perfect 10Smart Score rating on TipRanks with a “Moderate Buy” recommendation:

To conclude, we view Parker Hannifin Corporation as a winning combination of quality and growth. Its strong finances, outstanding earnings growth, solid execution of strategy, and bright outlook make it a valuable addition to the Smart Investor portfolio.


Charter Members of the 30% Winners Club

*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.

Ladies and gentlemen, please welcome the stocks that briefly fell below the 30% threshold but are now back with a bang. Our exclusive club’s ranks now include five stocks: the long-standing champions GE and TECK, and also AVGO, ORCL, and CDW.

The first-in-line to return to the Winners Club is now ANET with a 28.5% gain since purchase. Will it be able to close this narrow gap, or will someone else outrun it to the finish line?


What’s Next?

Our next commentary will come out on Wednesday, October 18th, before the market opens.

Until then – we wish you a world of investment success!

Access the full Smart Investor Archive, including all historical stock picks and original newsletters.


Portfolio Changes

New Portfolio Additions

Ticker Date Added Current Price
PH Oct 11, 23 $397.26

Current Portfolio Holdings

Ticker Date Added Current Price % Change
GE Jul 27, 22 $111.48 +99.50%
TECK Dec 8, 21 $41.49 +49.14%
AVGO Mar 22, 23 $858.41 +36.06%
ORCL Dec 21, 22 $109.71 +34.61%
CDW Jun 29, 22 $210.15 +32.94%
ANET Jun 21, 23 $194.73 +28.53%
JBL Jul 5, 23 $134.33 +23.02%
GD Dec 22, 21 $236.67 +16.15%
MOH May 3, 23 $340.11 +13.55%
WCC Sep 14, 22 $146.72 +9.36%
CI Jul 12, 23 $291.76 +8.59%
UNH Apr 19, 23 $524.24 +7.82%
STLA Sep 6, 23 $19.58 +7.82%
CHKP Jul 19, 23 $135.45 +6.39%
AMAT May 31, 23 $141.40 +6.08%
ACLS Sep 27, 23 $165.19 +5.16%
VRTX Aug 2, 23 $360.57 +3.69%
EG Oct 4, 23 $385.31 +3.25%
STM Sep 13, 23 $44.98 +1.83%
ACN Aug 16, 23 $312.32 +1.52%
APD Apr 26, 23 $287.91 +0.78%
ALG May 24, 23 $175.51 +0.19%
ADM May 10, 23 $74.15 -0.66%
TDY Aug 30, 23 $411.02 -1.25%
TSM Aug 23, 23 $90.61 -3.39%
APH Aug 9, 23 $83.46 -5.63%
EPD Jan 15, 20 $27.23 -5.84%
TEX Sep 20, 23 $54.91 -5.85%
PERI May 17, 23 $28.84 -7.74%
DE:IFX Apr 5, 23 $32.52 -8.38%
GPK Jul 26, 23 $21.78 -9.06%
LW Apr 13, 23 $96.37 -10.91%
INMD Jun 28, 23 $29.03 -18.96%



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