Parker-Hannifin Corporation’s (NYSE:PH) Price Is Out Of Tune With Earnings

When close to half the companies in the United States have price-to-earnings ratios (or “P/E’s”) below 18x, you may consider Parker-Hannifin Corporation (NYSE:PH) as a stock to potentially avoid with its 22.5x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it’s justified.

Recent times haven’t been advantageous for Parker-Hannifin as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Parker-Hannifin

pe
NYSE:PH Price Based on Past Earnings September 2nd 2020
Keen to find out how analysts think Parker-Hannifin’s future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The High P/E?

Parker-Hannifin’s P/E ratio would be typical for a company that’s expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings, dishearteningly the company’s profits fell to the tune of 19%. Regardless, EPS has managed to lift by a handy 27% in aggregate from three years ago, thanks to the earlier period of growth. Although it’s been a bumpy ride, it’s still fair to say the earnings growth recently has been mostly respectable for the company.

Looking ahead now, EPS is anticipated to climb by 11% per year during the coming three years according to the analysts following the company. That’s shaping up to be similar to the 13% per year growth forecast for the broader market.

In light of this, it’s curious that Parker-Hannifin’s P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren’t willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

While the price-to-earnings ratio shouldn’t be the defining factor in whether you buy a stock or not, it’s quite a capable barometer of earnings expectations.

Our examination of Parker-Hannifin’s analyst forecasts revealed that its market-matching earnings outlook isn’t impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it’s challenging to accept these prices as being reasonable.

Plus, you should also learn about these 2 warning signs we’ve spotted with Parker-Hannifin.

It’s important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

Promoted
If you decide to trade Parker-Hannifin, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account.


This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020


Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.