Stock Pick: Parker-Hannifin Corp. (PH) pull-back could be the time to buy

Industrial stocks are “taking a breather,” one analyst says

Chart showing trailing 12-month stock performance of Parker-Hannifin Corp.

There’s nothing better than finding a solid company that’s in the midst of a pull back.

One business that fits that bill is Parker-Hannifin Corp. (NYSE: PH), a Cleveland-based business that makes motion and control technologies for a number of industrial and aerospace markets around the world.

The company has seen its stock price fall by about 4.5% year-to-date, but Matt Arnold, an analyst with Edward Jones, says that’s only because it was up 58% in 2013.

“It had a good year last year, but with the more recent volatility in the broader markets industrial stocks like this one are taking a breather,” he says.

He thinks this company is a good buy, in part because industrial operations tend to do better in improving economic environments, but it’s got a lot more to it than that.

The company creates hydraulic and pneumatic systems that appear on a variety of products. The flaps on an airplane’s wing are likely created by Parker, so are the hydraulics found in manufacturing centres, he says.

While it makes a lot of different products, its end users all have one thing in common. They’re all economically driven and that’s a good thing today.

Arnold is bullish on the company’s aerospace division. It has a number of “sizable” programs with Boeing and Airbus and as long as airlines continue to do well, aerospace production will continue.

It’s also going to keep benefiting from the increase in U.S. residential construction. While many houses have already been built, the next phase is the development of plots for new builds. That will increase demand for its construction machines.

He also expects general machinery sales to increase as the economy improves and businesses start spending more on capital expenditures and that will help Parker. As well, it’s cutting costs in its less robust European operations.

Other analysts point out that the company has a healthy balance sheet and strong cash flow generation. A Zacks Investment Research report points out that it has increased its operating cash flow from $500 million in 2001 to $1.8 billion in 2013.

It’s also raised its dividend 10 times since May 2010. Its current yield is 1.56%, but that will increase as the business ups its payout further.

Right now, the stock is trading at $122 a share, but the median 12-month price target is $156 a share, according to S&P Capital IQ.

“The company is positioned to see its earnings power swell from here,” says Arnold. “It stands out good example if being opportunistic.”