Parker-Hannifin (PH) shares have outperformed the market over the past quarter. The company recently reported that fiscal 2Q23 adjusted EPS rose 7%. And management once again has raised guidance, remarks John Eade, analyst at Argus Research.

In our view, this well-managed company is on track to achieve its long-term goals of raising margins and growing earnings. Over time, we expect it to generate low double-digit EPS growth, driven by 3%-4% revenue growth, margin improvement, and share buybacks.

Meanwhile, the company recently reported that fiscal 2Q23 adjusted EPS rose 7% to $4.76, above the consensus forecast of $4.46. Revenue rose 10% organically to $4.7 billion. The adjusted EBITDA margin narrowed by 30 basis points to 2.4%. For the first half of the year, the company has earned $9.50 per share on an adjusted basis.

Along with the 2Q results, management once again raised its guidance for FY23. It expects organic sales to be up 6%- 8%, and looks for adjusted EPS of $19.20-$19.70, up from its prior outlook of $18.60-$19.30.

Recent trends had been problematic due to the coronavirus. However, the company has realigned expenses to meet lower demand, and as orders pick up, margins are widening.

A recent acquisition is also providing margin expansion opportunities. In September, the company acquired Meggitt PLC, a provider of aerospace, defense and energy technology, for $8.8 billion. Meggitt, headquartered in Coventry UK, had annual revenue of approximately $2.3 billion in 2020. Meggitt has diverse aerospace and defense exposure, with technology and products on almost every major aircraft platform. The acquisition almost doubles Parker-Hannifin’s Aerospace Systems segment.

Finally, the balance sheet is clean, and the company has an impressive history of raising the dividend. In 3Q22, the board increased the annualized payout by 29% to $5.32 per share, for a yield of about 1.6%. Our dividend forecasts are $5.58 for FY23 and $6.14 for FY24.

Compared to the peer group, Parker’s multiples are mixed but generally point to undervaluation. Our new 12-month target price is $390, raised from $335.

Recommended Action: Buy PH.

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