Analysis of Parker Corp. (9845:TYO)

PARKER CORPORATION is a Japanese manufacturer of industrial machinery and materials, active since 1951. It supplies machinery, materials and chemicals for the food, chemical, automobile and shoe manufacturing industries.

Parker is trading at a particularly attractive price of 7 times recurring earnings, 0.7 times tangible book value, 0.38 times sales and 5.92 times free cash flow. The dividend seems modest, with a yield of only 1.28%, but it is explained by a very conservative distribution ratio of 8.92%. There is therefore enormous room for Parker to invest in the development of the company or to continue to increase its dividend, as it has done very regularly in the past (14% per year on average over the last eight years).

Just like the dividend, earnings, cash reserves and asset values are growing over the long term, which demonstrates the strength of Parker's business model. The company is managing to create value for its owners over the long term and this is reflected in the share price which has more than tripled in the last five years.

Cash reserves are comfortable, with a current ratio up to 1.8 and a reduced liquidity ratio of 1.5. The company can therefore easily meet its current financial obligations. Gross margin is up to 25.8%, for a net margin of 6.5%. Return on assets is also up to 5.54%, for a return on equity of 11.8%. Once again, we are in the presence of a windfall at the Graham with also qualities to the Buffett.

A small shadow on the horizon, a rising debt ratio, at 6.6% (ratio between long-term debt and assets). Nothing too worrying, however, given the still correct rate and a free cash flow / total debt ratio of 0.41, meaning that all the debt could theoretically be wiped out in the space of 2.4 years using all the free cash flow. As already stated, debt is not fundamentally bad, as long as it is used wisely. It can thus constitute a leverage effect, while avoiding diluting the share capital to finance the development of the company. This is confirmed with Parker, which has not increased the number of shares in circulation for several years.

Parker is an "old" company, almost 70 years old, that is growing almost like a startup (30% of EPS growth per year over the last five years). I believe that the stock can easily triple in the next few years and that the dividend will do at least as well.

I just took a position on Parker.