Park-Ohio (PKOH)

Diversified manufacturing and supply chain services provider Park-Ohio (NASDAQ:PKOH) fell short of the market’s revenue expectations in Q1 CY2025, with sales falling 2.9% year on year to $405.4 million. The company’s full-year revenue guidance of $1.65 billion at the midpoint came in 1.5% below analysts’ estimates. Its non-GAAP profit of $0.66 per share was 21% below analysts’ consensus estimates.

Company Overview

Based in Cleveland, Park-Ohio (NASDAQ:PKOH) provides supply chain management services, capital equipment, and manufactured components.

Engineered components and systems companies possess technical know-how in sometimes narrow areas such as metal forming or intelligent robotics. Lately, automation and connected equipment collecting analyzable data have been trending, creating new demand. On the other hand, like the broader industrials sector, engineered components and systems companies are at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.

Competitors of Park-Ohio include NN (NASDAQ:NNBR), Lawson Products (NASDAQ:LAWS), and DXP Enterprises (NASDAQ:DXPE).

A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Park-Ohio struggled to consistently increase demand as its $1.64 billion of sales for the trailing 12 months was close to its revenue five years ago. This wasn’t a great result and suggests it’s a low quality business.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Park-Ohio’s annualized revenue growth of 2.7% over the last two years is above its five-year trend, but we were still disappointed by the results.

This quarter, Park-Ohio missed Wall Street’s estimates and reported a rather uninspiring 2.9% year-on-year revenue decline, generating $405.4 million of revenue.

Looking ahead, sell-side analysts expect revenue to grow 4.5% over the next 12 months. While this projection implies its newer products and services will spur better top-line performance, it is still below average for the sector.

For industrials businesses, cost of sales is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics in the short term and a company’s purchasing power and scale over the long term.

Park-Ohio has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 15.1% gross margin over the last five years. Said differently, Park-Ohio had to pay a chunky $84.93 to its suppliers for every $100 in revenue.

This quarter, Park-Ohio’s gross profit margin was 16.8%, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Park-Ohio was profitable over the last five years but held back by its large cost base. Its average operating margin of 4.1% was weak for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.

On the plus side, Park-Ohio’s operating margin rose by 3 percentage points over the last five years.

This quarter, Park-Ohio generated an operating profit margin of 4.7%, down 1.5 percentage points year on year. Since Park-Ohio’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Park-Ohio’s EPS grew at a weak 3.6% compounded annual growth rate over the last five years. On the bright side, this performance was better than its flat revenue and tells us management responded to softer demand by adapting its cost structure.

We can take a deeper look into Park-Ohio’s earnings to better understand the drivers of its performance. As we mentioned earlier, Park-Ohio’s operating margin declined this quarter but expanded by 3 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Park-Ohio, its two-year annual EPS growth of 58.6% was higher than its five-year trend. This acceleration made it one of the faster-growing industrials companies in recent history.

In Q1, Park-Ohio reported EPS at $0.66, down from $0.85 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street expects Park-Ohio’s full-year EPS of $3.42 to shrink by 5.6%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Park-Ohio broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.

Taking a step back, we can see that Park-Ohio’s margin dropped by 5.1 percentage points during that time. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s becoming a more capital-intensive business.

Park-Ohio burned through $19.5 million of cash in Q1, equivalent to a negative 4.8% margin. The company’s cash burn was similar to its $7.1 million of lost cash in the same quarter last year.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Park-Ohio historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 7.6%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, Park-Ohio’s ROIC increased by 3.5 percentage points annually over the last few years. This is a good sign, and we hope the company can continue improving.

Park-Ohio reported $54.5 million of cash and $695.7 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $148.8 million of EBITDA over the last 12 months, we view Park-Ohio’s 4.3× net-debt-to-EBITDA ratio as safe. We also see its $46.5 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We struggled to find many positives in these results. Its revenue missed significantly and its EBITDA fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock traded down 1.6% to $21 immediately following the results.

Updated: May 22, 2025 at 11:01 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Park-Ohio, you should also grasp the company’s longer-term business quality and valuation.

Park-Ohio falls short of our quality standards. To kick things off, its revenue growth was weak over the last five years. And while its expanding operating margin shows the business has become more efficient, the downside is its projected EPS for the next year is lacking. On top of that, its cash profitability fell over the last five years.

Park-Ohio’s P/E ratio based on the next 12 months is 5.7x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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