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Parker-Hannifin (PH) Q4 Earnings Beat, Sales Up, View Strong

Parker-Hannifin Corporation PH kept its impressive streak of beating estimates alive for the eighth consecutive quarter, as its adjusted earnings of $2.45 per share for fourth-quarter fiscal 2017 trumped the Zacks Consensus Estimate of $2.31 by 6.1%.

The earnings figures reflected impressive growth of 29% on a year-over-year basis. The year-over-year improvement in the bottom line came on the back of remarkable revenue expansion, improved margins and the revamped Win Strategy.

For fiscal 2017, Parker-Hannifin reported adjusted earnings of $8.11, which reflected growth of 26% over fiscal 2016.

Inside the Headlines

Net sales in the fiscal fourth quarter jumped 18% year over year to $3,496 million, but lagged the Zacks Consensus Estimate of $3,521 million. Contribution from the CLARCOR acquisition and excellent performance in the company’s Diversified Industrial segment were major growth drivers. Organic sales increased 6% year over year.

For fiscal 2017, sales came in at 12 billion, reflecting 6% year-over-year growth.

Parker-Hannifin’s adjusted total segment operating income for the reported quarter was $587.6 million, up 27.1% from the year-ago tally of $462.3 million. Orders also increased 8% in aggregate for the company.The company saw order growth for the fourth consecutive quarter, reflecting improving demand in key end markets and regions.

Segmental Performance

At the Diversified Industrial Segment, North American sales for the quarter jumped 32% to $1,665 million. Additionally, this segment recorded 10% growth in orders on a year-over-year basis.

Industrial International, which is also classified under the Diversified Industrial segment, performed strongly as well, as it reported a 12% year-over-year increase in sales to $1,228 million. In addition to robust sales growth, orders at this segment also increased 10% on a year-over-year basis.

Revenues at the Aerospace Systems segment were almost flat year over year at $602.8 million. Orders grew 1% at this segment in the quarter under review.

In addition to strong sales growth, Parker-Hannifin achieved robust operating margins during the reported quarter as well.Adjusted segment operating margins during the reported quarter came in at 16.8%, up 120 basis points year over year. In addition to accelerated revenue growth, successful execution of the company’s Win Strategy initiatives drove margins.

Parker-Hannifin Corporation Price, Consensus and EPS Surprise

Liquidity

As of Jun 30, 2017, Parker-Hannifin’s cash and cash equivalents were $884.9 million, down significantly from $1,221.7 million at the end of fiscal 2016. Long-term debt was $4,861.9 million at year end, substantially higher than $2,652.5 million at the same time last year.

Acquisitions

In the fiscal third quarter, Parker-Hannifin completed its most notable acquisition agreement to buy air filtration systems provider – CLARCOR Inc. – for roughly $4.3 billion in cash. CLARCOR is bringing a range of industrial air and liquid filtration products and technologies to the table, which will significantly boost Parker-Hannifin’s filtration product suite. Moreover, this acquisition will unlock fresh recurring revenue streams for Parker-Hannifin’s Filtration Group as 80% of CLARCOR’s revenue is generated through aftermarket sales.

The company is bullish on the integration of CLARCOR with its filtration business, which will help it double sales at this unit and optimize the aftermarket mix of Parker-Hannifin.

Further, on Feb 1, Parker-Hannifin announced the acquisition of Helac Corporation, which specializes in the design and manufacture of helical rotary actuators. Helac also manufactures a line of attachments used in material handling and construction equipment markets.

Helac will be integrated into Parker-Hannifin’s Cylinder Division within the Hydraulics Group and its sales will be reported under Parker's Diversified Industrial segment. The addition of Helac will aid Parker-Hannifin in expanding its hydraulics product portfolio and cater to customers in a wide variety of markets.

The company is currently integrating these two filtration units into its businesses. We believe that these acquisitions will unlock, significant synergies, and drive growth for the company in the times to come.

Guidance

Parker-Hannifin issued guidance for the fiscal year ending Jun 30, 2018. Adjusted earnings from continuing operations are expected to come in the range of $8.45–$9.15 per share. This guidance is adjusted for expected business realignment expenses of approximately $58 million, and CLARCOR acquisition-related expenses of $52 million.

To Conclude

This strong quarter concluded an outstanding fiscal 2017 for the company. Parker-Hannifin’s overarching Win Strategy has proven to be a tried and tested growth driver for its key financials. In addition, the company’s diligent global restructuring initiatives are also proving conducive to profitability. These initiatives helped Parker-Hannifin offset weakness in some key regions, thus strengthening the company’s position in the end markets.

Buoyed by the competency of the revamped Win Strategy and its strategic acquisitions, Parker-Hannifin is bullish about delivering its fundamental financial goals. The company has made impressive progress in key areas, including safety performance, customer experience, and profitable growth, and believes that these initiatives will unlock further growth opportunities.

Encouragingly, this Zacks Rank #2 (Buy) company has been witnessing broad-based improvements in many of its end markets and regions, indicating brighter prospects going forward in fiscal 2018.

Zacks Rank & Other Stocks to Consider

Other top-ranked stocks in the broader space include Barnes Group Inc. B, A.O. Smith Corporation AOS and Regal Beloit Corporation RBC, each carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Barnes Group has a solid earnings surprise history for the trailing four quarters, having beaten estimates each time for an average of 11.6%.

A.O. Smith also has a decent earnings surprise history, with an average beat of 3.3% over the trailing four quarters, beating estimates thrice.

Regal Beloit generated two beats over the trailing four quarters, for an average positive surprise of 1.5%.

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