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Bill Nygren on Parker Hannifin (PH)
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Parker Hannifin is the world’s leading producer of motion and control technologies. Its business is diversified across industries (machinery, trucks and aircraft) and geographies (earnings outside the U.S. account for over half of its total earnings). Priced at just over 11x expected 2012 earnings (plus goodwill amortization), Parker is valued like other highly cyclical businesses. However, the overwhelming majority of Parker’s profits come from its replacement parts business. This business is more profitable and more stable than the company’s original equipment business, and its branded Parker stores give it a large footprint and durable competitive advantage. Therefore, we think it should be valued at a much higher multiple than more cyclical companies. We are impressed with management’s track record as excellent operators and we like the way the company spends shareholder capital. On a recent conference call, the CEO explained a $700 million share repurchase as follows: “The reason that I made the biggest acquisition in the history of the company this last month was because the company is so cheap.” We wish more managements thought about share repurchases this way.
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