Balanced Risk-Reward for Parker-Hannifin - Analyst Blog

On May 29, 2014, we issued an updated research report on Parker-Hannifin Corporation PH. The company reported a modest financial performance for the third quarter of fiscal 2014 with earnings per share increasing 11.2% year over year.

Revenues also rose 1.6%. However, increased costs for ongoing restructuring activities and the higher price for raw materials continue to be a drag on the company's profitability. Nevertheless, the strong cash flow generation capability and a strong balance sheet are its strengths. In addition, the company offers good dividend hikes and its industrial sales business has been performing well since the last quarter.

The company's primary strength is its Win Strategy that includes dividend increase and other growth actions to measure customer service excellence through efficient business and cash management strategies. Since the company launched this strategy, it has been delivering cash flow greater than 10% every year.

Moreover, Parker-Hannifin has a healthy capital structure that allows it to make strategic acquisitions that are expected to be a good contributor to its revenue stream going forward. During the first quarter of 2014, acquisitions accounted for more than 2% increase in the revenues. Also, since the beginning of this fiscal, the company has paid $207 million as dividends. Moreover, in the year-to-date timeframe, the company has already repurchased shares worth $150 million as a part of its plan.

However, the company has been affected by the increase in prices for core materials like castings, steel, aluminum, copper and nickel among others in the quarter. Such increases can significantly weigh on the company's profits and margins.

Another, headwind for the company is the increasing cost of the ongoing restructuring activities that are proving to be a drag on it's financials as the benefits can only be received in the long run. Parker-Hannifin now expects the restructuring costs to be about $118 million or 55 cents per share for this year. This is an increase from the earlier projected value of $100 million for the period. However, the new figure includes the impact of some new initiatives that the company decided to undertake recently. 

Despite these headwinds, the company provided an encouraging outlook by increasing its guidance for fiscal 2014. The improved guidance seems to have emanated from healthier operating margins and improved order trends, driven by strong diversified industrial operations. However, the aerospace segment continues to be a drag on profitability.

Parker-Hannifin currently carries a Zacks Rank #3 (Hold). However, some better-ranked stocks that can be considered include Gorman-Rupp Co. GRC, Atlas Copco AB (ATLKY) and Blount International Inc. BLT. While Gorman-Rupp sports a Zacks Rank #1 (Strong Buy), Atlas Copco AB and Blount International both carry a Zacks Rank #2 (Buy).

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