Citi Moves To Sidelines At Parker Hannifin

• Parker-Hannifin Corp PH shares have been declining steadily and are down 23 percent year-to-date.
• Citi’s Timothy Thein downgraded the rating on the company from Buy to Neutral, while reducing the price target from $130 to $110.
• The company’s cost cutting initiatives and balance sheet flexibility are the positives against a backdrop of continued pressure on the company’s Industrial segment, Thein stated.

Analyst Timothy Thein mentioned that a weaker global IP backdrop and continue pressure across most of the commodity related markets are expected to have a negative impact on the performance of Parker-Hannifin’s industrial segment and the company’s overall earnings.

“Recent cautious commentary / outlooks from major N.A. Industrial distributors and other short-cycle indicators (which have exhibited strong historical correlations with PH’s NA sales/orders) suggests greater margin pressures than we assumed,” Thein wrote.

He added that although distribution accounts for nearly 60 percent of Parker-Hannifin’s North America Industrial sales, it represents a far greater percentage of profits.

Thein believes that apart from an easing of headwinds for the company’s O&G related activity, there are no other catalysts for driving a pick-up in North America sales.

Parker-Hannifin is trying to offset the impact from lower industrial sales by taking up restructuring and product simplification efforts. The Citi report noted, “During its recent analyst day, PH quantified the expected benefits from this as contributing (80 bps) towards its '20 corporate margin target.”

“While we are cognizant of the calendar (and historical 4Q Industrials outperformance), and the stock’s YTD underperformance, we no longer see compelling enough risk-adjusted upside to warrant a Buy,” Thein said. He recommended a swap in to Eaton Corp plc ETN [Rated: Buy] on “valuation de-coupling.”