3 Reasons PH is Risky and 1 Stock to Buy Instead

Parker-Hannifin has been treading water for the past six months, recording a small loss of 1.6% while holding steady at $671.75.

Is there a buying opportunity in Parker-Hannifin, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Is Parker-Hannifin Not Exciting?

We're cautious about Parker-Hannifin. Here are three reasons why you should be careful with PH and a stock we'd rather own.

1. Slow Organic Growth Suggests Waning Demand In Core Business

We can better understand Gas and Liquid Handling companies by analyzing their organic revenue. This metric gives visibility into Parker-Hannifin’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, Parker-Hannifin’s organic revenue averaged 2.3% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Parker-Hannifin’s revenue to rise by 2%, a slight deceleration versus its 6.8% annualized growth for the past five years. This projection is underwhelming and implies its products and services will see some demand headwinds.

3. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, Parker-Hannifin’s margin dropped by 2.5 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Parker-Hannifin’s free cash flow margin for the trailing 12 months was 15.8%.

Final Judgment

Parker-Hannifin isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 23.6× forward P/E (or $671.75 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of our top software and edge computing picks.

Stocks We Would Buy Instead of Parker-Hannifin

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