Has the Market Pushed Up Parker-Hannifin (PH)'s Valuation Too Far?

Falling -3.79% today, shares of Parker-Hannifin are giving us reason to question their average rating of buy. Did analysts get things wrong about this stock? Let's dive into the numbers to see whether PH is overvalued at today's price of $302.09 per share.

The most common valuation metric for stocks is the trailing price to earnings (P/E) ratio. Parker-Hannifin has a P/E ratio of 30.95 based on its 12 month trailing earnings per share of $9.76. Considering its future earnings estimates of $21.44 per share, the stock's forward P/E ratio is 14.09. In comparison, the average P/E ratio of the Industrials sector is 20.49 and the average P/E ratio of the S&P 500 is 15.97.

Parker-Hannifin's P/E ratio tells us how much investors are willing to pay for each dollar of the company's earnings. The problem with this metric is that it doesn't take into account the expected growth in earnings of the stock. Sometimes elevated P/E ratios can be justified by equally elevated growth expectations.

We can solve this inconsistency by dividing the company's trailing P/E ratio by its five year earnings growth estimate, which in this case gives us a 1.693 Price to Earnings Growth (PEG) ratio. Since the PEG ratio is greater than 1, the company's lofty valuation is not justified by its growth levels.

We can also compare the ratio of Parker-Hannifin's market price to its book value, which gives us the price to book, or P/B ratio. A company's book value refers to its present liquidation value -- or what would be left if the company sold off all its assets and paid off all of its debts today. PH has a P/B ratio of 4.352, with any figure close to or below one indicating a potentially undervalued company.

The final element of our analysis will touch on Parker-Hannifin's ability to generate cash for the benefit of its shareholders or for reinvesting in the business. For this, we look at the company's levered free cash flow, which is the sum of all incoming and outgoing cash flows, including the servicing of current debt and liabilities. Parker-Hannifin has a free cash flow of $2,211,686,000.00, which it uses to pay its shareholders a 1.6% dividend.

With most indicators pointing at a higher than average valuation with uncertain growth prospects, most analysts are either wrong about Parker-Hannifin, or their research has uncovered one or more qualitative reasons to invest in the stock. For example, the strength of the management team and their plan for executing the business strategy may have convinced some analysts to give less weight to traditional quantitative factors.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.