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Growth & Income

Todd Bunton

Parker Hannifin Corporation

PH

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Parker Hannifin Corporation (PH - Analyst Report) recently reported record sales and earnings for the first quarter of its fiscal 2012.

Management also raised its guidance for 2012, prompting analysts to revise their estimates higher too, and sending the stock to a Zacks #2 Rank (Buy).

Parker has also been returning value to its shareholders through stock buybacks and dividend hikes. It currently yields a solid 1.7%. Valuation looks attractive too with shares trading at just 11x forward earnings.

Company Description

Parker Hannifin is a leading manufacturer of motion and control technologies. It operates in four business segments:

North America Industrials (37% of revenue)
International Industrials (40%)
Aerospace (15%)
Climate & Controls (7%)

Parker was founded in 1918 and is headquartered in Cleveland, Ohio. It has a market cap of $12.8 billion.

Record First Quarter Results

Parker recently reported record results for the first quarter of its fiscal 2012. Earnings per share came in at $1.91, beating the Zacks Consensus Estimate of $1.70. It was a stellar 26% increase over the same quarter in 2010.

Sales rose 14% to a record $3.234 billion, ahead of the Zacks Consensus Estimate of $3.185 billion. The increase was driven by a strong 10% jump in organic sales.

Each business segment experienced top-line growth, with 3 of the 4 reporting double-digit growth. North America Industrials saw sales growth of 13%, while International Industrials rose 18%.

Gross profit expanded from 24.4% to 25.3% of sales while the operating margin expanded to a record high 16.1%.

Strong Outlook

Management anticipates another record year for Parker and raised its guidance for fiscal 2012 following strong Q1 results. The company now expects to earn between $7.25 and $7.85 per share, up from previous guidance of $6.70 to $7.50.

This prompted analysts to revise their estimates significantly higher, sending the stock to a Zacks #2 Rank (Buy) stock.

The Zacks Consensus Estimate for 2012 is now $7.43, within guidance, and representing 17% EPS growth over 2011. The 2013 consensus estimate is currently $7.99, corresponding with 7% EPS growth.

Returning Value to Shareholders

Parker generates strong free cash flow and has been using that cash to return value to shareholders through dividends and share buybacks. In the first quarter alone, Parker spent $292 million buying back approximately 4.4 million shares.

The company also pays a dividend that yields a solid 1.7%. As you can see in the chart below, Parker has been consistently raising its dividend over the last several years:

PH: Parker Hannifin Corporation

Reasonable Valuation

The valuation picture looks very reasonable for PH. Shares trade at just 11.0x 12-month forward earnings, in-line with the industry average, and a discount to its 10-year median of 14.0x.

The Bottom Line

Parker Hannifin offers investors strong growth potential and a solid 1.7% dividend yield. With estimates moving higher and a forward P/E of only 11x, now might be a good time to get in.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.

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