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Meet Parker Hannifin: Your Silent Money Pump

Posted: Jun 06, 2008 14:34 PM by Gregory S. Davis

Tickers in this Article: PH, ETN, HON, DE, CAT

Investors are no doubt familiar with the big-name oil companies that drill under the sea floor, but probably few know the name Parker Hannifin (NYSE:PH), even though it is one of the key companies that makes offshore drilling possible. Parker gives the heavy duty machines used by oilmen the power to drill deeper than ever before.

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It's a behind-the-scenes business, with eye-catching profits.

Background
Ohio-based Parker Hannifin is a world leader in motion and control products. If it has anything to do with hydraulics or fluid pumps and valves, Parker is the company to call. Its products can be found on construction sites, farms and oil rigs across the globe, and it provides products to the industrial, aerospace and climate & industrial controls industries. Last year revenue totaled $10.7 billion for the company, up 14% from the previous year. It fiscal year ends in June.

The Industrial segment generated 74% of Parker's revenue last year; however, investors should note that a large portion the revenue from this segment came from the 11 acquisitions it completed in 2007.

During the most recent quarter, revenue for Parker increased 14% over the previous year for the quarter ending March 31. Likewise revenue for the first nine months of its fiscal year was up 12%. During the same timeframe, international sales represented 41% of revenue. International sales, especially in Europe and the Asia-Pacific region, have driven sales for its international segment above North American totals. Last year 43% of Parker Hannifin's revenue was generated outside of the U.S. Strong sales volumes in Europe, Latin America and the Asia Pacific region led the way.

Competition not an Issue
Parker Hannifin has no direct competitor for all of the products and services that it markets. Other top-shelf fluid power systems providers to consider include Eaton Corp (NYSE:ETN) and Honeywell (NYSE:HON). Among these three investments, Parker has the lowest PEG ratio at 0.74 suggesting that it has a slightly higher five-year expected future growth rate than its peers. Eaton is sporting an attractive PEG of 0.93 while Honeywell is in the mix at 1.18. (For more on value investing, check out our tutorial Guide To Stock Picking Strategies.)

However, there is one cautionary note. The company has acknowledged the inverse relationship between interest rates and industrial manufacturing activity. Lower interest rates have typically led to an increase in industrial production while rising interest rates have the opposite effect. The Federal Reserve has reduced the federal funds rate seven times this year down to 2.0%.With talk of recession still fresh in the air, interest rates may level out for now, which is good for business. However, investors should be aware of how rising interest rates will impact Parker Hannifin revenues.

Conclusion
Parker Hannifin's stock has risen approximately 11% since its 3-for-2 stock split on Oct 2of last year. The stock has an attractive PEG ratio below 1, suggesting that it is a value play.

While Parker doesn't get the same media attention as a Deere & Co (NYSE:DE), Caterpillar (NYSE:CAT), or any of the off-shore drillers, it may make a great dollar-cost averaging play to capture the upside of the industrialization of emerging markets.

By Gregory S. Davis

Gregory S. Davis is an investment writer and consultant for his company G.Davis Capital Inc. His core methodology for choosing investments include patience, diversification and asset due diligence. Gregory is a graduate of the Wharton School of Business. He is also a board member of StoriesWork, a non-profit organization based in Durham, NC that uses storytelling to empower youth and individuals to utilize alternative dispute resolution tactics.

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