Parker Hannifin Beats - Analyst Blog

Parker Hannifin Corporation (PH) released its first quarter fiscal 2011 earnings result before the opening bell today, reporting earnings per share from continuing operations of $1.51. The company surpassed the Zacks Consensus Estimate of $1.07. Earnings for the period was more than three times the earnings of 45 cents in first quarter of fiscal 2010.

Revenue

Total revenue for the quarter was $2.8 billion, representing a year-over-year increase of 26.5% and also above the Zacks Consensus Estimate of $2.6 billion. The increase in total revenue was led by improved sales in all the segments, partially offset by foreign currency translation (1% negative impact). The company benefited from increased demand for its products in the markets and a surge in order rates in all the segments.

Segment Details

Parker's Industrial North America segment witnessed the highest growth rate, increasing by 36.0% to $1.1 billion. This was followed by Industrial International segment revenue increasing by 28.5% to $1.1 billion, Climate and Industrial Controls segment revenue up by 25.5% to $234.7 million and Aerospace segment revenue by 4.8% to $436.7 million.

Order rates increased in all the segments, with 31% growth in Industrial North America, 34% in Industrial International, 16% in Aerospace and 23% in Climate and Industrial Controls.

Income and Expenses

The company witnessed a record level operating margins during the quarter. Total segment margin was 15.5%, primarily led by strong margins in Industrial North America (17.8%) and Industrial International (16.8%).

Selling, general and administrative expenses were $333.6 million compared with $301.8 million in the first quarter of fiscal 2010.

Balance Sheet and Cash Flow

Parker Hannifin maintains a strong cash flow position. Cash flow from operations was $122.9 million (4.3% of sales) compared with $260.1 million (11.6% of sales) in the prior-year period. The current quarter cash flow from operations included a $200 million discretionary contribution to the company's pension plan, excluding which cash flow from operations as a percent of sales was 11.4%.

Cash and cash equivalents was $923.8 million with long-term debt of $1.7 billion and shareowner's equity of $4.9 billion.

Outlook

An impressively strong quarterly result, led Parker Hannifin to increase its earnings from continuing operations guidance for fiscal 2011 to the range of $5.20 to $5.80 per diluted share.

The company remains focused on executing its Win Strategy. A strong cash flow position allows it enough flexibility to make innovative investments, expand internationally and also an opportunity to make strategic acquisitions. Parker Hannifin is also well positioned to expand its global distribution and industrial retail channels.

We believe Parker Hannifin is a high-quality company that is showing good execution through its cost-saving efforts. Although PH stands to benefit from any recovery in global manufacturing activity, the company's increased scale in its international business as well as its meaningful aerospace presence increases its late-cycle exposure relative to past economic cycles.

We expect MRO (Maintenance, Repair, and Overhaul) to get a boost from continued deferral of capital investment in new machines. Parker Hannifin's strong exposure to MRO-type products and ability to convert net income into free cash flow will benefit future earnings.

Although PH operates in fragmented and cyclical markets, its strong distribution system provides an edge over its competitors.  We believe this distribution system is likely to result in asset turnover and returns on invested capital above those of its peers, despite the impact of the weak economy.

In addition, to stay ahead of its competitors, the company emphasizes product innovation and technological improvement. Major competitors of Parker Hannifin are Eaton Corporation (ETN), Honeywell International Inc. (HON) and Visteon Corp.

 

The company's domestic and foreign operations are subject to significant competitive pressures. To compete successfully, the company's Industrial Segment and Climate & Industrial Controls Segment must excel in terms of product quality and innovation, customer service, manufacturing and distribution capability and price competitiveness. Meanwhile, the Aerospace Segment must excel on the basis of technological and engineering capability, quality, delivery and service, and price competitiveness. The financial resources of certain competitors may put the company at a competitive disadvantage.  Construction Spending continues to remain weak worldwide, except Asia.

 

Parker-Hannifin Corporation is a leading worldwide full-line diversified manufacturer of motion and control technologies and systems, including fluid power systems, electromechanical controls and related components. In addition to motion and control products, the company is also a leading worldwide producer of fluid purification, fluid and fuel control, process instrumentation, air conditioning, refrigeration, electromagnetic shielding and thermal management products and systems.

We currently maintain our Neutral rating for the long term on Parker, with a Zacks #2 Rank (short-term Buy recommendation) over the next one-to-three months.

 
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